GBP/ZAR Buoyant but Beware of SONA Surprise 

 

"An FX positioning washout could also clear the way to get long exposure to ZAR, which is now the cheapest EM currency on HFFV [high-frequency fair value]. Short CHFZAR is a nice carry option in the months ahead" -TD Securities.

 

Image © Government of South Africa, reproduced under CC licensing

The Pound to Rand exchange rate has been quick to pare early February losses and third party central bank events may lead to further gains this week but there is also potentially the risk of a State of the Nation Address (SONA) surprise that could be very bearish for GBP/ZAR on Thursday.

South Africa's Rand rose against an underperforming Pound in the week to Tuesday while showing resilience against many other currencies, although GBP/ZAR was quick to recover its losses following Friday's non-farm payrolls report and Institute for Supply Management (ISM) Services PMI. 

Friday's data lifted market-implied expectations for the Federal Reserve interest rate sharply while Monday's trading session brought with it further broad gains for U.S. Dollar pairs and an extended rebound for GBP/ZAR ahead of a widely anticipated speech from Fed Chairman Jerome Powell. 

"Many of the FX pairs are starting to show trend reversal patterns developing," says Brad Bechtel, global head of FX at Jefferies.

"Thinking of the likes of DXY, EUR/USD, and several others where the charts made a fresh impulse low (or high) on Fed/BoE/ECB and then made a sharp reversal and extension the other way on NFP," he adds. 


Above: Pound to Rand rate shown at daily intervals with selected moving averages. Click image for closer inspection. 


Bechtel said in Monday market commentary that recent price action in USD/ZAR is also "starting to look like a reversal pattern" after the pair rose back above its 100-day moving average in the opening session of the new week. 

"We shifted our short-term view back in favor of USD, underscoring the one-two punch of ISM and NFP. Stretched positioning and valuations feature highly. We're max bearish both NZD & GBP," says Mark McCormick, global head of FX strategy at TD Securities. 

"An FX positioning washout could also clear the way to get long exposure to ZAR, which is now the cheapest EM currency on HFFV [high-frequency fair value]. Short CHFZAR is a nice carry option in the months ahead," McCormick and colleagues write Monday research.

U.S. job gains have prompted markets to go further toward pricing-in the interest rate profile outlined in December's Federal Open Market Committee forecasts but were counterbalanced somewhat by softening wage growth on Friday.

GBP/ZAR could rise alongside USD/ZAR if Chairman Powell's Tuesday appearance at the Economic Club in Washington lifts expectations further and vice versa but President Cyril Ramaphosa's State of the Nation Address is also a prominent affair this week. 


Above: Pound to Rand rate shown at daily intervals alongside USD/ZAR. Click image for closer inspection.  (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)


"We have the main event on Thursday as President Cyril Ramaphosa delivers his State of the Nation address," says Sebastian Steyne, an FX risk and hedging specialist at Sable International.  

"The market will look to this event to gain some direction as to how the ruling party plans to address the multiple issues facing the country, the most pressing of all being its power generating capacity," he writes in Monday commentary.  

State energy monopoly Eskom's ongoing load-shedding and resulting power failures are the most prominent concern among local economists and there is potentially some chance of Thursday's State of the Nation address offering a glimpse of light at the end of the tunnel. 

Market expectations are low ahead of Thursday's address but low expectations might be mistaken if the late January development at rail, port and pipeline company Transnet is indicative of a changing governmental approach toward the sometimes-controversial subject of "privatisation."

Any such change of approach would be a potentially very bullish development for the Rand and a potentially very bearish outcome for GBP/ZAR.