A host of major currencies are seeing fesh multi-year best's posted against the British Pound on Tuesday 4th October.
However, the Rand and Canadian Dollars are two currencies that appear to have failed to really put the pressure on Sterling.
While ZAR has failed to do so we can confirm the outlook continues to favour further declines in the GBP/ZAR pair as it remains in a concerted downtrend.
The move has been spurred on this morning by bearish news for the pound from the Conservative party conference over the weekend, where Prime Minister Theresa May reconfirmed her commitment to taking the UK out of the EU by setting a date for triggering Article 50 in Q1 of 2017.
"It seems that it is going to be hard to provide a tourniquet for sterling’s recent wounds given the solidity of the newly announced Brexit timeline (with March set to go down in the history books as when Article 50 was triggered), and the firmness with which May stated her intention to chase border control even if it means relinquishing Britain’s position in the single market," says Connor Campbell at Spreadex in London.
From a technical perspective the Pound to Rand exchange rate is closing in on the September 28 17.4000 lows, and if it manages to break below them that would probably confirm an extension all the way to a target at the 17.0500 August lows.
The fact the MACD momentum indicator is below the zero-line adds further weight to the negative outlook.
Why is the Rand not Stronger on SAB Miller Takeover Flows?
In the week ahead the most intensive day for data is Friday for the rand.
On Friday analysts will get to scrutinize the South African Central Bank’s (SARB’s) reserves for evidence of whether it has been intervening to prevent rand appreciation recently.
It had been though the Rand would strengthen more in the previous week as a result of the merger between the world’s two largest brewers Johannesburg-based SABMiller and AB InBev.
It was expected the deal would require the purchasing of 100bn Rand by AB InBev, and that this would substantially raise the currency, however, the opposite reaction occurred following the final vote by shareholders sealing the deal on Wednesday.
“The underlying puzzle remains the lack of support from SABMiller deal inflows. Could these flows simply have been overwhelmed, or possibly they have not been transacted yet – or maybe the SARB has been taking most of them?” questions Rand Merchant Bank’s John Cairns.
It remains a possibility that much of the cash needed has either already been exchanged at weaker rand levels or is yet to be transacted – the more probable being the former, given SABMiller AB InBev would have known about the merger before the market did.
Nevertheless, it presents an upside risk for ZAR and therefore a downside risk for GBP/ZAR in the coming week.
Another positive factor which could support rand growth are reports that the country’s highly regarded Finance Minister Pravin Gordhan may not now be arrested by the internal police, the hawks.
Concerns that this might happen, had weighed on the rand in recent weeks, however, it appears the charges may be dropped by prosecutors.
“SABMiller flows are not the only rand positive. Local media has been speculating that the NPA is considering dropping charges against Minister
Gordhan although it appears that they are being challenged on this by the Hawks. The good demand for the new sovereign offshore issue has also been encouraging,” said RMB’s Cairns.
The main headwind for the currency were last week’s poor trade figures, however, RMB’s Cairns dismissed these as resulting from short-term volatility, and that domestic demand and recovering commodity prices would support the exchange rate longer-term.
Against the view that the rand is set for more gains is the view that the currency is fundamentally overvalued promulgated by research from JP Morgan.
According to their fair value of the USDZAR pair based on platinum prices and bond spreads, the currency is 4.5% overvalued on M&A flows and insufficient pricing in of the country’s political risk premium.
Although Gordhan is out of the woods, J P Morgan point to other risk factors.
“We would warn against dismissing the underlying risk. Factionalism and tension (around SOEs, the nuclear program and personnel) are likely to periodically resurface, in our view, especially now with the 2017 ANC elective conference in sight,” they report in their note.
Even though they advocate buying USD/ZAR now they also accept the currency could continue to gain strength from the SAMMiller AB INBev M&A inflows until October 11.
“Recent ZAR strength is related to M&A flows, in our view, and, as such, it is likely to prove temporary. A significant transaction is now going through the market. On our understanding, the execution period is September 19 to October 11 and, hence, there is still a risk of some further ZAR inflows. However, we expect as much as 70% of the inflow to be reversed as shareholders might choose to replenish their international shareholdings. The timing of the outflow is likely to be primarily after October 11, but some pre-hedging of the associated ZAR FX risk might already have started (this would be ZAR selling). As such, and once again taking into account the valuation entry point, we are comfortable to already enter a short ZAR position,” say J P Morgan.