ZAR's value has been exaggerated by the hype surrounding the currency implications posed by the merger between South Africa's SABMIller and AB InBev argue analysts.
The Rand is between 4% and 5% overvalued due to the media hype surrounding the estimated 100bn rand of inflows from AB InBev’s takeover of rival brewer SABMiller, argues Kiran Kowshik, an analyst at Unicredit.
The suggestions that the Rand is overvalued implies that a correction to fairer value is required at some stage.
“The media focus on investment inflows into South Africa is extremely high right now but this is not supported by actual flows (unlike the case in June),” says Kowshik.
Drawing on evidence compiled by Bloomberg, Kowshik shows how the recent appreciation in the Rand correlates – albeit loosely - but correlates nevertheless, to the frequency of media articles mentioning the high inflows expected from the merger.
Now that the merger has concluded, attention will turn to the next significant event for the rand, the delivery of the medium-term budget on October 26, which Kowshik sees as a negative risk and could therefore forece revaluation in ZAR:
“Market attention may shift from investment inflows to local politics as the Finance Minister’s presentation of the medium-term budget policy statement approaches (26 October). ZAR-RUB has good downside potential.”
Pound to Rand: More Gains
From a technical perspective, the GBP/ZAR pair has been in a concerted downtrend, but this has stalled after spiking lower during sterling’s recent flash-crash.
There has since been a weak rebound which has also now run out of energy.
An Elliot Wave analysis, which is a form of cycle analysis, of the move down indicates that the pair may have completed a wave down since the May 2016 highs.
Elliot waves are composed of five waves which we have labeled on the chart below.
After the end of the fifth wave the cycle reverses and starts its up phase, and it is highly possible we are at the start of that up phase.
We see a break above the current highs at 17.7773 as providing confirmation for a continuation of the fledgling uptrend higher to an initial target at 18.0000.
This technically bullish outlook also benefits from reflecting the more negative fundamental outlook proposed by Unicredit in their analysis of pair above.