Pound Forecast to Extend Advances Against South African Rand on Combination of Drivers
The Pound has risen for seven out of the last seven days against the Rand after concerns about South Africa’s political stability led to a weakening of the rand, whilst heightened expectations of the Federal Reserve moving to raise interest rates further pressured the currency.
The Pound to South African Rand exchange rate appears to be in the process of reversing its down-trend after fundamental developments mainly in South Africa led to the pound strengthening and the rand weakening.
GBP/ZAR reached a low of 17.0533 on August 15 before suddenly reversing and moving higher; the current exchange rate is at 18.8277.
The move higher was driven partly by an easing Brexit fears in the UK which supported a rebound in the Pound.
Political developments in South Africa are meanwhile boiling hot once more following news that the National Prosecuting Authority (NPA) had received a “docket” for charging the finance minister Pravin Gordhan with crimes from his previous tenure as director of the Tax Office.
According to the chief prosecutor a decision as to whether to prosecute Gordhan had not yet been reached, only that they were reviewing evidence, with a possibility that he might be arrested.
Gordhan has been under investigation for his role in setting up and directing a special investigation unit at SARS, which it has been argued overstepped legislation in its activities.
If he is arrested it would have a massive impact on the Rand as he is seen as a stabilising influence and one of the last remaining bulwarks against the country being downgraded to junk status by credit rating agencies.
The Rand’s next move may well be dependent on the outcome of the investigation which will probably come to a head in the next two weeks, says Rand Merchant Bank’s (RMB) John Cairns in a recent note:
“If Gordhan is still in office in two weeks’ time then we can start talking about USD/ZAR reversing below 14.00 again but surely not now,” says Cairns.
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US Fed a Key Driver of ZAR Weakness
The political turmoil caused by the Gordhan investigation, however, is not the only factor heaping pressure on the Rand.
The machinations of the Federal Reserve is also thought to be behind the recent sell-off too, after commentary from Fed officials last week raised the chances of an early interest rate hike in the US.
This view was cemented by Fed president Yellen’s comments on Friday at Jackson hole where she said that the chances of a rise before the end of the year had risen over recent months.
The Fed raising rates is generally seen as negative for most emerging market economies such as South Africa as it would lead to more expensive repayments or many companiesThe , as a high proportion of loans are to emerging market (EM) businesses originate in the US.
The concomitant rise in the dollar following a Fed hike, would also increase repayments on existing loans further increasing EM pain.
Therefore, whilst Yellen’s view that the US and global economies are on the mend were positive for EM’s, they were offset by the financial hit from a rise in US interest rates.
RMB’s Cairns, remarks:
“All of USD/ZAR’s upside since late Friday can be attributed to the Fed. Yellen had a mixed message at Jackson Hole, saying that the case for rate hikes had strengthened but that hikes would remain gradual. Two other Fed members, however, hinted at two rate hikes this year. Probabilities of the Fed hiking have consequently risen to 33% for a September hike, 60% for a single hike this year, and 14% for two hikes this year.”
From a technical standpoint the recent seven-day rally in GBP/ZAR is a little young from which to extrapolate an extension, but also strong, an indication of an extension higher.
The pair has just reached a tough barrier in the form of the monthly pivot at 18.20 from which it pulled back down.
Monthly pivots are levels of support and resistance where the exchange rate often stalls or reverses due to buying or selling pressure from traders who use the lines as gauges of market direction.
The pull-back from 18.20 may only be temporary and the mini-up-trend higher appears to be intact, therefore a second attempt to break above the pivot is likely and a move above the 19.00 highs would confirm a continuation higher to the next level at 19.2850.
The pair alos looks as if it completed an Elliot Wave lower from the May highs, which finished at the recent mid August lows.
Elliot waves are composed of five smaller waves and the move down corresponds very closely with the look of a classic five part move down.
The fact that the MACD in the lower pane has crossed above the zero line, has also increased the chance of a continuation higher. 
