Charts suggest there remains potential for more upside in GBP/ZAR whilst fundamentals are suggesting further weakness.
The Pound to Rand exchange rate is seen trading at 18.1631 at the time of writing as the decline from September highs at 19.5021 extend.
Concerning the outlook, there are however reasons to be constructive on Sterling's ability to deliver further gains.
The longer-term chart view of GBP/ZAR shows the pair having completed an a-b-c correction down from the 23.76 highs and poised to move higher.
The pair posted three up weeks in a row - a strong bullish sign- as well as two candlestick patterns – a three white soldiers and three inside up pattern.
Since peaking at 19.5000 it has pulled back
The weekly chart seems to suggest strongly that the correction has finished and the longer-term up-trend is now likely to take over again – at the very least it suggests a move above the 19.5000 highs, to a probable initial ‘base-camp’ target at 20.0000
On the daily chart the pair is showing a smaller a-b-c pull-back following the peak at the 19.50 highs.
The pull-back is still extending lower but there is a good chance it could stall at support at the 61.8% Fibonacci retracement of the previous rally at 18.00, and probably rotate and start to resume its short-term up-trend higher from that level.
Such a move would also make sense in terms of the longer-term weekly chart outlook.
If there is a resumption of the short-term up-trend then a move above 19.000 would probably open the way to a continuation up to 19.500.
A break above that would then see the exchange rate probably continue up to 20.000, and round number resistance.
Political crisis may be easing
The rand has gained over recent days as a result of “local risk premium being unwound” due to an easing in concerns that Finance Minister Pravin Gordhan could be arrested.
He has been accused of setting up an illicit tax surveillance unit at the South African Revenue Service (SARS) when he was in charge of it.
The possibility he might be charged had weighed on the rand since he is considered a competent finance minister, especially over recent weeks.
Gordhan’s close friends and powerful allies have reportedly rallied around him and collected funds to be used in his defence if the Hawks – an internal investigation service – arrest him as they have been threatening to do for months.
There is less chance this may happen over the next few weeks, especially as the rating agency Standard and Poor are visiting the country to make their assessment of its economy and revise their rating.
South Africa’s debt rating is currently one notch above junk status and is therefore vulnerable to being downgraded to junk, an event which would weigh heavily on the outlook for the rand.
It is unlikely the hawks would want to coincide their arrest with the visit as it could probably push the country’s rating down a notch.
We would say, therefore that there is a good chance of the rand starting to appreciate again and GBP/ZAR falling in the week ahead.
This contrasts, however with the technical perspectives we have already mentioned, which is less bullish for the Rand.
Another major event for the pair is the South African Reserve Bank (SARB) meeting ton decide interest rates on Thursday.
The SARB is not likely to change its policy according to Rand Merchant Bank’s FX analyst John Cairns, who says:
“Event risk this week is all about central banks, although almost certainly more about what they say than do.
“The market prices only a 12% chance of the Fed acting, but we’ll all be watching for signs on whether they will hike in December…
“We expect the SARB to remain on hold.”
The wording of the statement therefore may be more significant than the actual policy decision.