Pound Forecast to Reach 18.00 Against South African Rand in Week Ahead

Risk trends are likely to dominate the movement of the South African rand in the week ahead, which may be positive for ZAR.

The South African Rand has proven a major beneficiary of increased investor appetite for emerging market assets.

We have seen capital flowing from low interest rate western markets (US and Europe) and into high-yielding Asian and African markets, this flow has in turn bid up emerging market currencies.

"Just a few weeks after the Brexit vote, anticipation of massive policy easing globally switched market sentiment back to risk-on. Large foreign capital inflows have strengthened most Asia currencies against the USD," notes Amy Yuan Zhuang at Nordea Markets.

The question for ZAR will then be whether this risk-on environment will last. Zhuang is not sure that this dynamic can continue though and she says net inflows will likely start decelerating as investors look to book profits.

Therefore, those betting on a stronger Rand, should be aware that the the pro-ZAR mood music could be turned off over coming weeks. 

However, the exact timing of such a switch remains unclear. 

Pound Remains in a Technical Downtrend Against the Rand

Looking at the charts, we see that GBP/ZAR still appears to be in a dominant down-trend.

The move down which began at the 23.00 May highs and probably ended at the 18.65 July lows is known as a 'measured move'.

Measured moves are three-wave zig-zags where the first leg is roughly equal in length to the third leg.

This one looks to have completed – the question now is, where is the exchange rate likely to go next?

Normally markets reverse at the end of measured moves, but in this case the exchange rate has resumed its descent, after breaking below the 18.6596 lows.

The down-trend is expected to extend, despite the completion of the measured move, with the next target at 18.00.

The lack of bearish momentum after the break lower, however, could indicate downside may be stunted, so we remain marginally bearish, but bearish nevertheless.

Latest Pound / SA Rand Exchange Rates

	Live: 22.6076▼ -0.19% 12 Month Best: 25.4721
*Your Bank's Retail Rate	21.839 - 21.9294
**Independent Specialist	22.2911 - 22.3815 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Watch pro-ZAR Investor Sentiment

There is no major data out for the South African rand in the week ahead so it is likely that the currency will gain most of its directional drive from broad global risk trends.

A rise in risk appetite will push ZAR higher.

July's Eurozone PMI’s showed the impact of Brexit on the Eurozone economy was less significant than at first thought, as the data showed PMI’s surprisingly robust.

This seemed to indicate less of a chance the Brexit shock was impacting further afield – since if anywhere was going to be impacted by Brexit, it was going to be Europe, as it is the UK’s largest trading partner.   

With Brexit concerns settling down, therefore, and less chance of a global effect, there is a strong reason to see a recovery in risk appetite, and possibly therefore for the rand.

The up-and-coming Federal Reserve July meeting this week, will probably also impact on global risk trends.

Given it is expected that the FOMC are likely to take a more optimistic view in terms of interest rates, this may also help support risk appetite