A compelling chart pattern favours a rise in the GBP/ZAR exchange rate in the week ahead but a heavy UK data calendar and political risks in both SA and the UK must be watched.
The Pound has been moving higher against the Rand since recording 2017 lows back in March when one Pound bought 15.40 Rand; it has now reached a level where one Pound can buy 18.90.
This shows a substantial appreciation in the Pound and depreciation in the Rand, and there are signs this trend will continue.
The weekly chart is showing an uptrend continuation pattern has now formed over the last three weeks (outlined on the chart below with a black rectangle), auguring higher prices for the exchange rate.
The pattern consists of three bars or candles, the first one of which is a long green candle, the second, a candle with a smaller body - small enough to fit twice into the first candle - and the third, a long and green candle like the first.
The occurrence of this pattern in the middle of an uptrend is positive, but it is made even more so when accompanied by another indicator, called ADX (Average Directional Movement Indicator) when the indicator is at a level between 20-30.
ADX measures how strong the current trend is - when it is between 20-30 and moving higher it provides confirmation for the three-candle continuation pattern described above and increases its probabilities of success.
After this pattern occurs, prices normally rise about as high as the length of the third candle extrapolated higher but the optimum target varies depending on the pair.
For GBP/ZAR we see a potential target 19.5000 which fits roughly with the guidelines for establishing a target using the height of the third candle.
19.5000 is also a major round-number which attracts supply because traders are more likely to take profit at a major 'milestone'.
Confirmation of more upside would come from a break above the current 19.0425 highs.
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Data and Events for the Rand
The main release this week will be September Retail Sales data out on Wednesday, November 15, at 12.00 GMT, with the market expecting a 4.5% rise in October compared with the higher 5.5% recorded last October.
Beyond Retail Sales, however, there are no other major releases and political and macroeconomic issues are more likely to dominate the Rand than data.
As such the main focus may be any comments President Jacob Zuma makes about higher education.
Reports have been circulating that he is about to announce a new policy of free higher education for students from households earning less than 350k Rand.
Whilst it is a positive move to improve access to education critics say that the state cannot afford to offer it for free and it will increase the country's debt burden with potentially -negative economic consequences.
One major fear of those against the free education proposals is that they may lead to a credit rating downgrade and such a downgrade could push South African (SA) debt down to sub-investment grade status, which would have extremely negative consequences for the economy and growth.
Countries, like individuals, have credit ratings and when those ratings fall below a certain level, called investment grade, it is very difficult for those countries to borrow money.
South Africa's rating has been teetering on sub-investment grade for a long time and if it falls below that level it will be considered junk status.
The reason this impacts on the Rand is because a below investment grade credit rating would make it very difficult for SA to attract foreign capital, reducing inflows and therefore demand for the Rand.
The Rand could fall as much as 5-10% after a credit downgrade, says JP Morgan FX Strategist Anezka Christovova, who thinks the market is too complacent about the possibility of a downgrade when credit rating agencies carry out their next review in November.
Previously it had been thought unlikely that they would downgrade SA in November because of the proximity of the presidential elections in December when Zuma - who appears to be considered negatively by markets - will be replaced by his successor.
However, the plan to spend more on free education as well as the recent budget which showed a growing hole in the exchequer's pocket, suggest the possibility of a downgrade before then.
"The market is too optimistic that downgrades would be postponed and/or on the outcome of the ANC’s December elective conference,” says Christovova, adding: “We share neither of these hopes.”
Data and Events this Week for the Pound
We look for political risks to erupt this week and potentially move the Pound around in volatile swathes of buying and selling.
There are both positive and negative risks for Sterling, with the most positive the inching towards a possible Brexit deal is the most significant.
The Pound gained ground on Friday after the EU's chief negotiator Michel Barnier said that the UK had two more weeks to come up with a solution on the first three conditions for moving onto the trade talks, viz: the cost of divorce, Ireland border and status of EU citizens in the UK.
There is hope about the divorce bill ever since the Prime Minister said she would consider paying a figure of 56bn which is in line with EU demands, however, the other two issues remain outstanding and problematic as far as we know.
Nevertheless, the market seemed hopeful of a solution emerging within two weeks last Friday or the Pound would not have risen.
"If the UK government abides by these demands, GBP could well build-upon a recovery that was given life last month by reports of Ms. May's willingness to stump-up £53 bn for a deal," said BNY Mellon senior Currency Strategist Neil Mellor.
Theresa May's Grip on Power
The more negative factors against the Pound are related to the standing of the Prime Minister after a story was leaked to the press over the weekend that 40 Tory MP's said they were prepared to sign a letter to oust Theresa May, which according to Conservative party rules is 8 less than the 48 needed to trigger a leadership contest.
If 48 MP's signed a letter of no-confidence in May then that would increase uncertainty for financial markets and the Pound would drop like a stone, initially anyway.
"Today’s move tells us that the markets are on alert for political risks emanating out of the UK, and if there is a party coup to replace Theresa May then political turbulence is likely to weigh on the pound further," says Cityindex, Market Analyst, Kathleen Brooks, however, she steers clear of signalling a cliff-edge fall for GBP in the event of a leadership contest.
The Passage of the Withdrawing Bill
The other issue this week is the passage of the 'withdrawing bill' through the commons.
In the week ahead MP's will be debating final amendments to the bill, which basically sets the agenda and the rules for what will happen during Brexit.
One major point of contention is whether the bill should be changed to allow MP's a vote on the final Brexit deal negotiated with the EU.
Advocates of this - from both major parties - argue it would be in the country's best interests as it could be used as the last line of defense against a hard Brexit - that is a Brexit in which no trade deal had been agreed.
From a hard data perspective, the main release in the coming week is inflation data on Tuesday November 14, at 09.30 GMT, with October expected to see a rise of 3.1% compared to a year ago, which would represent a rise of 0.1% from the previous 3.0% result and see inflation hitting a new 2017 peak.
Such a rise in inflation would probably be marginally supportive of the Pound as it would increase in the chance the Bank of England (BOE) will raise interest rates again, perhaps even sooner than previously expected.
Nevertheless, the BOE themselves have forecast inflation peaking at 3.1% in October - but then rolling over - so it would take a sustained rise for several months to really support the Pound - or a shock rise in October of over the 3.1% expectation.
Higher interest rates strengthen currencies because they attract more inflows of foreign capital from global investors drawn by the promise of higher interest returns - and vice-versa with lower interest rates.
Central banks control the base interest rate which all other banks use to set their interest rates.
When inflation is too high central banks raise interest rates to bring prices back down by encouraging saving over spending and discouraging borrowing by making it more expensive.
Another major release for the Pound over the next five days is employment data on Wednesday at 9.30 GMT.
The main focus will not be on the Unemployment rate, however, unless it is widely divergent from estimates, but rather on wage data.
This is because earnings are directly linked to inflation with a pick up in the former leading to a rise in the later.
Therefore a strong pick-up in earnings (Ex-bonus) which were 2.2% previously and are expected to moderate down to 2.1% would help Sterling, and vice-versa for a fall.
The final major release of the Pound is Retail Sales data on Thursday at 9.30.
On a monthly basis Retail Sales both Core is expected to rise from very depressed readings in September of -0.7% and -0.8% respectively, rising to 0.1% for both.
Compared to October last year, however - ie year-on-year - they are forecast to show a -0.4% fall for Core and -0.7% for headline compared to 1.6% and 1.2% respectively in October 2016.
The data is significant for the Pound because a further contraction in Retail Sales will increase concerns about growth and mean it is less likely the BOE will put up interest rates, resulting in weakness for Sterling.