Buy the South African Rand say UniCredit and Societe Generale Strategists
- Written by: Gary Howes
The South African rand has recovered from its recent blip. Buy ZAR say two leading strategists.
The pound has been in decline against the South African rand since the 10th of January when the exchange rate reversed having spiked to an all-time record at 25.91.
The turn lower in the GBP to ZAR over recent weeks comes amidst stabilising global commodity prices that have turned sentiment more positive against the commodity currencies, a group that includes the ZAR, Australian, Canadian and New Zealand dollars.
However, a floor to the declines in GBP v ZAR has been formed following fresh signs of political instability in the country’s finance ministry.
Why has the Rand Recovered?
The jitters over a Zuma / Gordhan rift have for now been dispatched.
"In a fragile economy where good news is scarce, talk is not cheap, it can either be costly or a jewel. Talk proved to be a jewel for the rand yesterday when The Presidency released a statement dismissing media reports that the rift between Finance Minister Gordhan and SARS commissioner Moyane puts Gordhan’s position under threat," says John Cairns at RMB in Sandton, Johannesburg.
The statement went further and said that there is no war between President Zuma and Minister Gordhan.
The rand correctly recovered by almost 40 cents following the release of the statement, despite below-consensus local credit data and worse-than-expected trade and budget deficits for January which come out at R17.96bn and R30.84bn respectively.
"Such is the power of communication, when it’s good it calms the markets," says Cairns.
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.
The Pound to Rand Forecast: Any GBP Gains Likely to be Limited
As the headline risks surrounding the UK’s European Union referendum fade we are seeing the potential for a British pound recovery.
We note that any recovery will be brief in nature, nevertheless, it could catch many off guard.
The recovery in the GBP/ZAR comes off the base at 21.50-21.70, an area that coincides with the 200 day moving average.
The 200 day moving average is what it says on the tin; the average pound to rand exchange rate over the past 200 days.
It is not uncommon to see an exchange rate that has been falling stop its decline and reverse direction once it hits the support of a major moving average.
The ability to stay above the moving average tells us that the longer-term move higher is still alive and the recent declines may be a reversal within that longer-term ascent.
Therefore we would look for further gains from here.
However we are wary that the pound sterling will be subject to shocks in the lead up to the EU referendum and are hesitant to suggest we will see fresh highs being made in GBP/ZAR.
We would suggest the pound will struggle to advance above the 50 day moving average which will now form resistance.
This is located at 23.00.
UniCredit and Societe Generale: Buy ZAR
Beyond the technical and UK-inspired reasons to believe upside in the GBP to ZAR exchange rate will be capped, we also observe an improving global undertone that could aid the rand.
Meanwhile analysts at both Societe Generale and UniCredit have come out with recommendations to buy ZAR.
"We believe that a number of factors are coming together for a more supportive backdrop for EM commodity currencies in the weeks ahead. Positive Chinese policy rhetoric is certainly helping," says Kiran Kowshik at UniCredit in London.
UniCredit recommend buying ZAR against an equally weighted basket of USD and EUR at current levels targeting a 6% return risking 2.70%.
Meawhile Soc Gen's Jasper Dannesboe says he sees compelling valuation for the ZAR.
"With commodities bouncing off their November lows, the ZAR REER continues to lag South Africa's improving terms of trade. Relative to its long term (10y) average, the rand is now 27.4% cheaper, reflecting significant depreciation over recent years," says Dannesboe.
Furthermore it is argued that the combination of the ZAR's carry-to-volume profile shifting into more compelling territory versus its peers, supported by a "strongly credible SARB," can streamline the currency's performance.
"Recent undertakings on the fiscal policy front are likely to underpin a further narrowing of the country risk premium, as rating actions look likely to be deferred into early 2017," says Dannesboe/
