The South African Rand (ZAR) remains poised for further gains and any weakness in the currency should be viewed as temporary profit-taking action.
The Pound to South African Rand exchange rate looks set to extend its quest to retest the 2016 lows which were recorded in mid-August when GBP/ZAR hit 17.0609.
A number of factors are behind the GBP/ZAR's recent collapse with a rally in global stock markets and commodity prices proving particularly beneficial to the high-yielding and high-risk Rand.
When investors are in the mood for risk, ZAR is often the first stop.
Also providing a sentiment boost is news that the merger between two brewing giants could see about R100bn worth of inflows as ABI makes a purchase of SABMiller.
Nevertheless, the deal will not be signed and sealed until after shareholder’s vote next Wednesday, when there is an outside chance of the deal being blocked.
It is unlikely therefore that ABI will conduct most of their FX conversions until after the deal has been struck – however at the same time there is the argument that if they exchange a considerable amount ahead of the deal they can avoid paying the higher rate which could result from news of the deal being approved at the shareholder meeting.
The Rand was also supported by a positive report from Moody’s which saw only a 33% of a downgrade of its credit rating to junk status.
There is also the likelihood that Pravin Gordhan, the respected Finance Minister, who is seen as a steadying hand on the economic tiller, would remain in his job.
Gordhan had been threatened with arrest on charges of setting up an illicit tax investigation unit at the South African Tax Office where he was previously governor.
However, tensions seem to have eased recently after the Gordhan camp saw many friends and allies rallying in support.
RMB: ZAR Should Yield Further Strength
While the South African unit has been strong of late, those watching the currency should be aware that it is looking increasingly prone to a bout of weakness, as would any financial asset that has trended so strongly for an extended period.
"Be aware these can be vicious and quick. Be aware also that Fridays are particularly prone to this sort of action as traders close out positions before the weekend," says John Cairns at RMB in Johannesburg.
Nevertheless, Cairns' bias is to see any Rand losses as a stumble in the rally rather than anything more.
"The rally has been so amazingly strong that it is not going to dissipate so sharply. What is more, the massive ABI inward flows are ongoing and going to accelerate after this coming Wednesday," says Cairns.
But, Chart Studies Suggest the Pound is Not Dead Yet
Looking at the charts now for a technical perspective and we see that the pair has simply extended its short-term down-trend, which looked for a while like it was simply part of a correction higher.
This may mean that the broader down-trend which was in progress before the pair bottomed in August could be resuming.
The exchange rate has now touched major support from the 50-month MA, however, at the current lows, and this could act as a support level and stall the down-trend, or lead to a bounce higher.
Nevertheless, the MACD is also pointing lower and has pushed below its zero line signalling the possibility of the trend has reverted down.
Overall we still see the pair as roughly balanced from a technical perspective.
For confirmation of a bearish continuation and a clearance of the 50-month MA we would want to see a move below the August lows at 17.00, with the next target from there at 16.29.
For confirmation of more upside we would want to see a move back above 18.10, to target resistance at 18.50, with a break above the early September highs providing the strongest bullish signal, and opening the way to a test of 19.00.