The Rand continues to weaken despite talk of higher-yielding emerging market currencies rebounding.
This may be due to the impact of falling gold prices as gold is South Africa’s largest export so a fall in prices would be expected to weaken the Rand.
The reflationary Trumponomics theme currently in vogue, as well as commentary from the Governor of the Bank of Japan that he sees a resurgence in global growth, are not helping the yellow metal either.
We see gold's downtrend as pretty steep and likely to weigh on the Rand for some time.
Reserve Bank to Cut Interest Rates
A further influence could be cementing expectations that the South African Reserve Bank (SARB) is likely to cut interest rates in 2017.
A reduction in interest rates would also weaken the currency, as it would attract less flows of high-interest rate seeking foreign capital.
“Local inflation yesterday came out on expectations of 6.6%. However, we have adjusted our 2017 forecasts downwards to reflect the methodology Stats SA will use to incorporate the lotto ticket price increases.
“We now expect headline inflation of 5.4% (5.6% previously) and core inflation of 5.3% (5.7%). This strengthens our view that the SARB will cut rates next year, starting in May,” said Rand Merchant Bank's John Cairns.
From a technical perspetive, there is a definite upside bias for the Pound against the weakening Rand.
The chart below shows GBP/ZAR has broken above a key trendline, in a move which is a strong bullish sign.
Although the pair failed to follow-through to the upside the break is definitive and suggests a move higher will eventually unfold.
The MACD momentum indicator is also looking bullish after recovering from the zero-line which it drifted down to during the recent gentle sell-off.
We forecast a move to 18.0000 then possibly 18.5000.
A break above 17.7505 would confirm a move up to the first step at 18.0000, whilst a break above 18.0000 would confirm a move up to an end target at 18.5000.