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South African Rand Can Extend Gains says Analyst

ZAR

Image © Pound Sterling Live

The South African Rand's recovery against the Pound, Dollar and Euro can extend according to a market analyst we follow, with gains likely to come even as the country faces an increasingly difficult battle with covid-19.

"Fundamentals and technicals are nicely aligned for the ZAR and despite the risk of adjustments, the outlook favours the South African currency," says Peter Stoneham, an options market analyst with Thomson Reuters.

The Rand has risen 10% against the Pound since reaching a multi-year low in early May, with the Pound-to-Rand exchange rate falling back from 23.70 to current levels nearing 21.00.

Against the U.S. Dollar the South African currency has recovered 13% since mid-June, "and USD/ZAR contained within a tidy bear channel," says Stoneham. "Bigger-picture dynamics show the ZAR resuming its recovery from a December 2019 to early April slump and USD/ZAR retracing a 16.3210 to 17.5325 counter-trend rally."

USDZAR

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Any further gains in the South African Rand would come against a domestic environment of rising covid-19 infections and deaths, which prompted authorities on Sunday to reintroduce a number of restrictions.

However, we noted that the restrictions are unlikely to have a substantial detrimental effect on economic activity given they involve the ban on alcohol sales and a nighttime curfew. Only the imposition of restrictions on movement and business would likely trigger significant anxieties amongst investors over the economy's trajectory.

"As the global economy recovers, the market is likely to focus on external factors and ignore South Africa's domestic woes. The ZAR could appreciate as the commodity rally extends, foreign trade revives and quantitative easing pushes investor flow towards higher yields," says Stoneham.

"Struggling growth, ballooning debt and rating downgrades are likely to rein in the ZAR, but only after a period of post-lockdown stability and recovery," adds the analyst.

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