South African Rand Surges on Inflation Over-Shoot, Forecast to Push Pound To 21.00

If the pound to rand exchange rate manages to penetrate below the neckline at 22.6480 then there is a strong chance the pair will tumble down towards 21.30.

A fresh boost for the South African rand was seen in the form of domestic CPI inflation which breached the SARB’s upper target of 6.0% in January. 

This is the first time prices have done so in 17 months.

It accelerated to 6.2%y/y from 5.2% in December largely due to transport and drought-infused food price inflation.

"The constant pressure on the rand together with the sharp increase in food prices, mainly due to a worsening drought, have exacerbated inflationary fears as both the economic and inflation outlook have deteriorated further over the past few months," says Arnaud Masset at Swissquote Research.

The acceleration in price pressure will likely catch the attention of decision makers at the SARB who will likely have to raise interest rates again in 2016.

Raising the REPO rate is a mechanism used by the SARB to quell inflation; at the same time it boosts the yield on South African financial assets.

As global investment flows are attracted to South Africa so the rand is bid higher. Indeed, should this occur then we could well see the rand stabilise in 2016.

"Unfortunately for Governor Kganyago, the weakness of the domestic situation, coupled with the global risk-off sentiment will put the SARB in a tough situation," says Masset, "the South African Reserve Bank already increased its benchmark interest rate by 0.50% to 6.75% in late January in an attempt to re-anchor inflation expectations."

However, given these exceptional market circumstances, Swissquote believe the SARB will have no choice but to proceed with another rate hike at its next meeting in mid-March.

"Ordinarily, high inflation should lead to a weaker currency. However, expected interest rate hikes following above-target and above-consensus inflation pushed USD/ZAR by 1.7% to its strongest level of 15.48 since the beginning of January," says John Cairns at RMB.

The pound to South African rand exchange rate meanwhile fell sharply lower to 22.12 - this is the rand's strongest level against sterling since December the 9th.

Our Technical Forecast is Playing Out

We reported ahead of the inflation data that the GBP/ZAR was on target to break notably lower having studied recent price action and accordingly set out our predictions.

The SA Rand quickly fought back and reasserted its pressure on the neckline of a large head and shoulder’s top (H&S) - a very bearish indicator for the pair.

If the pound to rand exchange rate manages to penetrate below the neckline at 22.6480 then there is a strong chance the pair will tumble down to an eventual minimum target at 20.1935.

A clear breach below the neckline would be indicated by a move below 22.5000 with an initial target at 21.3153 where the 200-day MA is situated an likely to provide support, followed by the eventual minimum target at 20.1935, which is calculated from extrapolating the height of the H&S down by 61.8%.

Trading volume shown in the bottom pane of the chart has steadily fallen as the H&S has developed, which is supporting criteria the pattern is authentic.

MACD, which is a momentum study, has collapsed during the pattern's formation further supporting its validity.

Latest Pound / SA Rand Exchange Rates

	Live: 22.6363▼ -0.07% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.8667 - 21.9572
**Independent Specialist	22.3194 - 22.41 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

British Pound Under Sustained Pressure

A good deal of then GBP/ZAR decline can be owed to the recent deterioration in the headling GBP v EUR pair which has again felt notable selling pressure.

The markets are structurally geared against GBP/EUR and we note selling pressures here tend to feed into selling pressures elsewhere.

The fundemantal justifaction for the selling however lies with concerns over the UK's future in the European Union with HSBC analysis suggesting the pound is undervalued by 7% against the US dollar thanks to fears over the referendum.

In this unprecedented environment we can see why it is so easy to chase sterling lower. But, should the UK vote to remain in the UK we can expect a rapid recovery right across the board.

The performance in ZAR against the EUR and USD remains shaky.

The rand has continued appreciating on the back of the recent recovery in sentiment, as ZAR is one of the commodity block currencies, making more than usually sensitive to events in China and the outlook for global monetary policy – both of which have brightened over the last few days.

So keep an eye out for developments in this sphere.