ZAR has fallen back against the Pound ahead of the weekend having taken a cue from broader trends in global risk sentiment.
Commentators are today ascribing the weakness in global stocks and commodity prices to news that North Korea has conducted a fifth nuclear test.
With the South African Rand being so responsive to commodity prices and sentiment it should come as no surprise that the currency is trading weaker.
The GBP/ZAR has bounced back after falling for much of the week gone by and is quoted just below the 19.00 level.
The pair also appears to have benefited from a supportive trend-line in the 18.80s which appears to have provided technical support.
Nevertheless, with ZAR having shown considerable volatility of late we would suggest it is far too early to call an end to the currency's post-Brexit strength.
A break below the 18.80 level would probably lead to a continuation of the down-trend to the next target at 18.60, situated at the monthly pivot.
This is a level of support and resistance which traders use to gauge the direction of the trend, and initiate counter-trend trading strategies.
The fact that the MACD has broken down below the trend-line is a sign the trend has changed and is now bearish:
The recent rise in the pair has been mainly due to a stronger Pound due to easing Brexit fear.
However, the changeover to a stronger Rand in recent days was as a result of the South African currency appreciating from a lower chance of the Federal Reserve (Fed) raising interest rates in September.
Traditionally higher interest rates in the US are negative for emerging market economies such as a large proportion of their debt is either denominated in Dollars or originates from the US, and higher rates or a stronger dollar can both impact negatively on the ability of businesses to repay their dollar denominated or US loans.
However, that may not be the whole story, as recent analysis from Morgan Stanley suggests a rise in US rates may actually be positive for some high yielding EM currencies rather than negative.
They argue that if there is a hike it will be a ‘dovish’ hike with a low expected trajectory for rates over the long-term which promise to be lower for longer.
This broad low-interest environment could still be supportive for high yielding EM’s such as the Rand.
Credit Rating Cut Still Lurks as a Threat to ZAR
The greatest risk factor for the Rand remains political instability with a reminder of just how sensitive ZAR can be to this risk being provided by the recent flaring up of the Gordhan saga.
If Gordhan is arrested the Rand could suffer, especially if the credibility of the treasury is brought into question.
This would in turn invite credit downgrade threats from the world's largest credit rating agencies.
Rand Merchant Bank’s (RMB’s) FX analyst John Cairns says the risks of a rating downgrade remain alive:
“S&P has provided a timely reminder of rating risks. They repeated yesterday that medium-term growth, fiscal rectitude, the strength and independence of institutions such as the Reserve Bank, and labour and SOE reforms are all needed to avoid a downgrade.
"It is hard not to read this as an explicit warning that recent developments have been in the wrong direction. We expect S&P to downgrade SA’s foreign currency rating to sub-investment grade in December.
"Even worse, if Minister Gordhan were to be removed from office, we think it is likely that they would downgrade the local currency rating to sub-investment grade next year.”
The other political issue relates to the government’s poor showing in recent municipal elections in which it lost a large share of the vote and its own share fell below the 60% psychological threshold, however, how this impacts on the currency in unclear.