The Pound / South African Rand Rate: We Remain Geared for Further Losses

The GBP/ZAR pair is in a steep down-trend but has reached a strata of chart support in the 17s; on the fundamental front the outcome of South African elections is proving mildly positive for the Rand.

GBP/ZAR has steadily appreciated against the Pound, pushing GBP/ZAR down through the 18.00 level in the process. 

The rate is currently trading in the mid-17s.

The main driver of the pair has been the Bank of England meeting on Thursday which saw the UK's central bank unveil a panoply of stimulus measures with which to combat any economic downturn that may result following the EU referendum.

Whilst seen as a positive for the economy, such stimulus is generally negative for a currency as the increase in supply dilutes the individual unit value.

The negative impact on interest rates is also detrimental to the exchange rate as lower interest rates tend to attract lower inflows of foreign capital.

An extension to GBP/ZAR weakness has been provided courtesy of Ian McCafferty, a member of the Bank's decision-making body.

McCafferty triggered further GBP selling when he noted in a piece he penned for the Times that further rate cuts and quantitative easing could be necessary over coming months.

The chart of GBP/ZAR continues to show the pair falling in a steep stream of red which as yet remains intact

The pair has pierced the 200-week moving average (MA) at about the 17.9500 level and is now moving down towards the next significant support level at the 50-month MA at 17.5500.

Historic support dating back to 2014 between 18.80 and 17.50 may also be a factor slowing the down-trend.

We see a continued possibility that bears will stay in control and push the exchange rate lower, with a break below the 17.75 level leading to a move down to 17.55.

At the time of writing we note that these support levels have been breached and as such will take a step back having observed technical supports appear to have little value in the current market.

We remain geared for further losses.

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.

 

Municipal Elections Broadly ZAR-Positive

In South Africa, recent elections saw the ANC lose notable support in major urban areas as increasing numbers of black middle-class voters withdrew their support. 

The three largest parties, the ANC, DA and EFF parties now enter into talks to form a coalition with a governing majority in a number of metros.

Rand Merchant Bank’s (RMB's) Isaah Mhlanga argues that a coalition is likely to be positive for the economy and for the rand, as it is likely to result in less corruption.

He also thinks that fiscal consolidation plans are not likely to be derailed by ‘populist policies’ as feared by rating agency Fitch, but rather a coalition might ensure more fiscal discipline.

A centrist compromise between the right leaning DA and the EFF whose ideologies would be forced to meet in the middle, would be a favourable result, according to Mhlanga:

“The electorate has spoken and the ball is back in the hands of politicians to negotiate coalition governments within 14 days after the declaration of free and fair election results. Given the animosity between the ANC and the EFF, a DA and EFF coalition seems likely but these two parties are wide apart in their ideologies, making such a possibility very interesting to watch.

"The market will likely respond positively to such an outcome as it will force the parties towards the middle from either extreme. Indeed the rand strengthened as the results trickled in..”

Rand traders, therefore, will probably be tracking developments closely in SA over coming days as politicians negotiate various coalitions.

However, others argue that the process of achieving coalition could play ZAR-negative.

TreasuryOne believe the next phase of the electoral process will be the interesting one when parties start to lobby for coalitions, "and this could bring some instability to the market."

"The elections surpassed most people’s expectations but there is still a lot of work to be done before the full effect of the elections will be seen," note TreasuryOne.

Has the Pound hit Bottom?

For BK Asset Management’s co-founder and FX guru Kathy Lien, the big question is, has sterling bottomed?

According to her analysis there is a strong possibility the pound has since she sees it as unlikely that the BOE will cut interest rates any lower, after BOE governor Carney expressed a clear aversion to negative interest rates at the last press conference:

Yes, the central bank is ready to lower the bank rate further if needed and increase all elements of Thursday’s package but Carney also made it very clear that the “lower bound in interest rates is above zero” and he is “not a fan of negative interest rates.”

He believes that helicopter money is a “flight of fancy” and he doesn’t see a scenario where negative rates is discussed, so if BoE were to ease again, it would be in other ways like additional bond purchases.

"The bank reduced its GDP outlook for 2017 but kept its 2016 forecasts unchanged. It also believes that inflation will rise given the weakness of the pound. Having taken such an aggressive stance, the Bank of England is now in wait-and-see mode, which could actually lift sterling because of the extreme level of short positioning,” says Lien.