Pound to South African Rand Surges Higher, But be Warned, this Gordhan Saga Might Not Have a Lasting Impact

The South African Rand (ZAR) has come under notable pressure over the past 24 hours as the country's finance minister is asked to present himself before authorities to answer questions concerning corruption.

The Pound to Rand exchange rate (GBP/ZAR) has broken above 18.00 once more, a stunning turn in fortunes for a currency pair we had earmarked for a test of 17.00 at the start of the week.

Indeed, the technical studies that warn of a test of 17.00 remain sound in our view, and the massive momentum that favours the Rand at present could well establish once more.

The big bounce in GBP/ZAR comes as the political landscape in South Africa shifts against ZAR.

Finance Minister Gordhan has been asked to report to the country's anti-corruption unit, the Hawks, by 10AM on Thursday to receive a warning statement.

This is a continuation of the "SARS rogue unit allegations" that started in Februrary, when Gordhan was asked by Hawks to answer 27 questions regarding his involvement.

The allegations stem from alleged corruption Gordhan may have been involved in when at the SARS - South Africa's tax department.

"As was the case in February, we saw ZAR come under heavy selling pressure yesterday – falling at one point by more than 3% against the dollar," notes Viraj Patel at ING in London. 

But, a word of warning, this weakness may be short-lived.

"Recall that after the initial sell-off back in Feb, $/ZAR stabilised the next day and we expect similar price action today until further details are revealed," says Patel.

It is for that reason we are not ready to put our GBP/ZAR forecasts to bed and do not believe the political intrigue will have a lasting impact on a fundamentally appreciating Rand.

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GBP/ZAR Chart Forecast: 17.00

The Rand has seen impressive gains (see chart below) against is major counterparts, especially the pound.

Since the eve of Brexit the currency pair has actually fallen 18.2%.

The pair is overall in a medium-term, down-trend, punctuated by consolidations which look like bear flags, at intermittent points on the way down.

The current pull-back also looks a little like a bear flag, or a bearish wedge pattern, both of which will probably eventually lead to another break lower, and a continuation of the down-trend.

The current pull-back has almost reached the trend-line at 17.9500, where it would be expected to encounter strong resistance.

From the current market level, a move below the 17.29 lows would probably be sufficient to signal a continuation of the down-trend.

The next target down is the round-number at 17.0000.

For the Rand, Much Hinges on Janet Yellen's Speech on Friday

The outlook for the South African Rand is so tethered to the Dollar that analysts are expecting little movement in either until Janet Yellen’s speech at Jackson Hole on Friday.

The event is widely seen as one of the most market moving for the dollar in the week ahead – and what is likely to drive the dollar is likely to drive the rand, which is inversely correlated to the dollar.

Yellen’s speech is entitled, “Designing Resilient Monetary Policy for the Future,” a title which, according to Rand Merchant Bank’s John Cairn’s, doesn't inspire much hope in gaining clarity on Fed policy in the short-term.

Hhowever, analysts such as Scotiabank’s Shaun Osborne are of the opposite opinion, thinking the “bar” is quite “low” for Yellen to say something “bullish” or hawkish.

“USD risk is elevated as we head into Friday’s Jackson Hole speech from Fed Chair Yellen, with a low bar to a bullish surprise as we consider the market's relatively muted expectations for Fed normalization,” said Osborne.

His argument is based on the recent chorus of more hawkish comments from other senior Fed members, including Deputy Governor Fischer's hawkish words over the weekend,  as well as New York Fed’s Dudley and San Francisco’s Williams, who criticised futures markets for not pricing in a higher probability of the Fed raising rates in 2016, last week.

If Scotia’s Osborne is right, and Yellen signals the possibility of more Fed rate hikes than the market currently thinks, we could see a strong rally in the Dollar, but a corresponding fall in the Rand.

This would therefore play positive for the GBP to ZAR rate.

This is due to the expected negative effect that higher interest rates would have in the US on the emerging markets, who often borrow in dollars because of its stability, and would see their repayments increase due to dollar strength as well as higher interest rates.

The one problem with expecting the Fed to raise rates before December is the Presidential election in November.

Analysts argue the Fed is much less likely to increase interest rates right before a presidential election, and evidence, though from a very small sample, appears to bear that view out.

If Yellen has shifted to a more bullish stance, therefore, it beggars the question of when a closer rate hike move might take place?