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Forecasting Where South African Rand Strength Will End Against the US Dollar, Euro and British Pound

South African rand exchange rate outlook

The South African Rand’s rally against the US dollar, euro and British pound continues; what are the key levels to consider over the near-, mid- and long-term?

The about-turn witnessed in the Rand exchange rate complex has been impressive with the currency now on a determined drive back to more familiar haunts against its peers. 

Domestic turbulence, particularly that pertaining to the finance ministry, has settled, but it are global developments that have really stoked demand for the African currency.

A combination of the following factors are keeping the ZAR in command of its peers:

  • A strong upturn in global commodity prices
  • A US Federal Reserve that is scared of raising interest rates, thus creating a weak dollar
  • South Africa’s high inflation levels require more interest rate rises ahead, so while the US, UK and EZ are keeping rates flat, SA is raising, therefore attracting investor capital

With regards to the advance against the US Dollar, all eyes are now on the big 14.00 psychological level.

Momentum is firmly with Rand-buyers at present with the USD/ZAR trading well below its key momentum indicators, notably the 20, 50 and 100 day moving averages.

Furthermore, "some key levels have been triggered along the way with the Rand trading below the 200-day moving average which suggests that there is further scope for Rand gains, and we can see a test of R14.00 in the near future," says Alet Opperman at Treasury One in Johannesburg.

Moving averages are instructive in that traders tend to cluster a significant amount of buy and sell orders around these points in anticipation of the dominant move stalling, reversing or accelerating once it has broken out the other side.

They are thus, more or less, self-fulfilling in nature.

Opperman notes that, "normally when the Rand has done a lot of work, there is a phase of consolidation which could halt the Rand gain until new momentum is found."

We would therefore agree that the 14.00 level could well question the move which is currently going in ZAR’s favour.

The outlook for the rand against the US dollar

Pound to Rand: 20.00 and Below Looking Inevitable

Just as the 14.00 is the level markets will be targeting on USD/ZAR, we would suggest the big number to note on the GBP to ZAR exchange rate is 20.00.

The trend here is similar - ZAR-buyers are firmly in control and with the British Pound hamstrung by the EU referendum in mid-June we would suggest there is little fundamental justification for any kind of long-lasting Sterling strength until we move into the second half of 2016.

While 20.00 is a 'big' number we also note that there is little recent historical justification for suggesting the pair’s decline may end here.

The outlook for the pound to rand rate

In October 2015 the GBP/ZAR bounced off 20.00 quite nicely, but the 100 day moving average was also located here at the time.

In August the rally in GBP/ZAR was resisted by 20.00, and this is more useful in that it appears the psychological dominance of the number played a part. Needless to say, the resistance did not last for long.

In fact, we see the prospect of a break well below 20.00 over coming weeks and would imagine the zone between 17-18 looks like an attractive resting place owing to the area's strong hold throughout 2014.

Latest Pound / SA Rand Exchange Rates

United-Kingdom South-Africa
Live:

20.675▲ + 0.31%

12 Month Best:

21.9236

*Your Bank's Retail Rate

 

19.972 - 20.0547

**Independent Specialist

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Euro to Rand: All the Way Down to 15.00

The trajectory of the move lower here is not as steep as it is with the currencies previously discussed, a view that will chime with the observation that the Euro has been a strong performer of late.

In fact it has advanced against both the Pound Sterling and US Dollar as markets take on board the view that the European Central Bank (ECB) may have reached the ‘end of the road’ when it comes to cutting interest rates.

With the promise of ever-lower yields on Eurozone bonds therefore at an end the impetus to sell the Euro in order to buy foreign bonds (and therefore their currencies) has diminished.

In fact, it is the high yield offered by South African bonds that continues to attract foreign money at present.

“This makes the Rand volatile for as easy as it is to invest money here, it is as easy to withdraw. Should something happen again that is South Africa specific we could see the Rand jump higher very quickly,” warns Treasury One’s Opperman.

There is also the prospect that South African sovereign bond yields are downgraded by the big ratings agencies in the near future should the treasury and leadership lose further credibility. In fact, most investors in a recent poll conducted by RMB believe this cut is inevitable.

Should it happen, we could well see inflows of capital cool, or even reverse.

Nevertheless, the EUR/ZAR is underneath its momentum indicators, and we must respect that this advocates for further declines.

The only major level of support seen ahead is at 15.00; a level that dominated trade from August to December 2015 and one that is clearly a strong level of equilibrium for the exchange rate.

The euro to rand exchange rate outlook