Our studies suggest the GBP/ZAR exchange rate could falls towards 16.00 in the wake of the latest twist in the Gordhan saga but analysts at Investec and RMB warn that the Rand's woes are not yet necessarily over.
The South African Rand rose sharply at the start of the trading week on a substantial reduction in South African political risk after allegations of fraud against the country’s Finance Minister were dropped on Monday, October 31st.
Pravin Gordhan had been charged with fraudulently approving an overly generous early retirement package to a former Tax Office employee when he was head of the Office in his previous job.
The threat to Gordhan's tenure at the Treasury was a clear negative for the Rand as he brought some much-needed credibility to a country that is teetering on the edge of a ratings downgrade.
The country’s credit rating stands at only one level above junk status – ‘junk’ being defined as sub-investment grade and therefore not eligible for inclusion in certain investments such as pension funds.
Analysts are already concerned about how rating agencies will grade SA debt when they come to review it at the end of the year, fearing a downgrade to Junk.
It's Not Over for the Rand
"The market is rightly pricing out political risk. We warn, however, that it is not going to be clear sailing. Today sees the start of the court case to halt the release of the Public Protectors report and we cannot tell you how, where or when, but we can warn you that further political shocks are almost a certainty," says John Cairns at RMB in Johannesburg.
One surprising area of concern for Cairns is foreign activity in the local bond market - given the political news one would have thought that foreigners would rush in – "instead, they were aggressive sellers," says Cairns.
"This might be a one-off, so let’s not get carried away, but inflows are needed if the rand is going to keep rallying," says the analyst.
Furthermore Cairns also cites risks in the possibility of President Zuma reshuffling his cabinet and the start of a court case to halt the release of the Public Prosecutors 'State Capture' report which forms the next focus for financial markets.
"SA still has a number of hurdles to overcome, with Fitch and S&P country reviews due early in December," says Annabel Bishop at Investec.
Fitch recently raised some concerns, stating “South Africa's MTBPS highlight that fiscal consolidation remains a government priority but will be insufficient to avoid a further delay in stabilising the rising debt to GDP ratios given low economic growth”.
"We expect 2nd of December 2016 will see SA’s hard currency long-term sovereign rating from Standard & Poors’ remain unchanged at BBB- with a risk of a downgrade remaining due to the negative outlook," says Bishop.
Investec believe a S&P downgrade on SA’s local currency long-term sovereign rating (from BBB+ to BBB) is more likely, potentially as early 2nd December 2016, but could occur next year.
Further, Investec say Fitch could downgrade the outlook on SA’s local currency rating (BBB) to negative at the end of this year, and potentially the foreign currency rating (BBB-) as well, given its mildly negative commentary on the MTBPS.
Technical Analysis Gives us a Fresh Target to Aim For
Our studies suggest the GBP/ZAR exchange rate could falls towards 16.00 as the latest twist in the Gordhan saga plays positive for the South African currency.
From a technical perspective, the GBP/ZAR pair has plunged to new depths following the most recent sell-off, as GBP fell versus the stronger ZAR.
The move lower is in line with a dominant downside bias and continues the downtrend.
We expect it to forge ever lower providing it can pierce below the key 16.40 round number level, with the next target at likely support to the downside from the monthly pivot lying at 16.28.