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Pound vs. South African Rand's Rally Higher Stalls, All Eyes on ANC's Ramaphosa

 

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The Pound's advance against the Rand has stalled, but

The Pound-to-Rand exchange rate is rising in a channel which started at the March lows; it has moved up from about 15.50 Rand to a Pound to 19.00, which it reached three weeks ago.

The move takes the GBP/ZAR 0.8% lower over the last month, but for 2017 the Pound is still just over 9.0% higher. Our latest technical studies suggest the Pound's run of good form might be coming to an end, however there remains a good degree of uncertainty to be wary of when it comes to technical studies owing to the explosive nature politics is playing in GBP/ZAR from both sides of the equation.

The weekly chart below shows how the pair peaked at 19.10 and then formed a very bearish, long, red, key reversal bar, which is when prices make a new high but then close below the low of the previous period all in one week.

Key reversals often mark the end of trends - in this case, the uptrend from the March lows.

This could well be a sign that the current longer-term trend higher has come to an end ahead of the big 20.00 level; after all, the GBP/ZAR rarely spends protracted periods of time above 20.00.

Yet the uptrend is not necessarily dead and we believe the stalled move higher could be symptomatic of market uncertainty ahead of the ANC's congress due later this month.

Since the key reversal, the follow-through to the downside has been disappointing and last week the pair formed a long-legged Doji candlestick, which is representative of indecision, meaning the market can't decide whether to go higher or lower.

The Doji has confused matters as it is neutral and even looks vaguely bullish, and yet the key reversal was bearish - to summarise the charts are giving mixed signals.

The four-hour chart below is also not showing any clear trend one way or another.

The exchange rate fell after touching the upper channel line, declining in a move from 19.00 to 18.00, labelled 'A'.

Then it formed a two-bar reversal and rose in a move labelled 'B', which has quite strongly risen up to 18.50.

Momentum is rising in line with 'B' which is bullish and has made a new high, at 'M'.

'M' is higher than momentum at 'N' when the exchange rate was higher, indicating that upside momentum is now stronger.

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Data and Events for the Rand

The main event for the Rand in the week ahead is likely to be the results for the nominations of candidates for the ANC leadership elections from local party branches.

The reason this is important is because the two leading candidates represent different political ideologies which are expected to impact on the economy and by extension the Rand in vastly different ways.

The Deputy President Cyril Ramaphosa is chracterised as a reformer and a moderniser who likely to be positive for the Rand, whilst Dr Dlamini Zuma is seen as someone who will maintain the political status quo, may reform the central bank and probably will increase public spending on social programmes.

Given the country's existing debt problems, economists argue her likely agenda is unaffordable, and her election would be negative for the Rand.

Nominations from seven states have already come in: Guateng, Western Cape, Eastern Cape, Northern Cape, North West, Free State and Mpumalanga, and they show Cyril Ramaphosa in the lead with 62% followed by Dlamini Zuma's 38%.

The nominations from the last two remaining states Limpopo and KwaZulu-Natal, are expected out in the next few days.

It is important to point out that nominations are not the same as actual votes, which will be cast at the ANC's election conference in December, and it is misleading to see them as such. 

For a start, each ANC branch only gets one nomination but it can send more than one delegate to the conference.

This is because one delegate is usually sent, for every 100 branch members, and branches vary greatly in sizes.

Yet for those trying to predict the outcome of the election, the nominations from KwalZulu-Natal (KZN) could be used as a barometer of sorts, according to EWN Political Analyst Stephen Grootes.

"The equation appears to boil down to this: with the strong support Ramaphosa gets from the provinces backing him, and the strong support Dlamini Zuma gets from those supporting her, it may come down to the KZN margin," says Grootes, who adds:

"Again, to oversimplify, if Ramaphosa gets around a third of the votes in KZN, or more, he is probably in a relatively safe position, but anything less than that will result in a Dlamini Zuma victory."

The election maths, however, is extremely complicated and it is likely to be a very closely fought campaign:

"In the end, so complicated is this maths that with every vote counting, it could all come down to a sum in the minutiae of the ANC’s constitution," says Grootes.

So far the nominations from the first seven states have fallen broadly as expected which is way they have had little effect on financial markets, says Rand Merchant Bank analyst John Cairns, who does not appear to share Grootes belief that the KNZ result may indicate the final result. 

"The market has not paid a huge amount of attention to the figures, believing — rightly or wrongly — that nominations will not correlate with actual votes," says Cairns.

Reports that the ANC economic transformation subcommittee will recommend the nationalisation of the South African Reserve Bank (SARB) when they publish their proposals today (Monday) could impact negatively on the Rand.

On the hard data front, GDP growth rate for the 3rd quarter is released on Tuesday at 9.30 GMT and is expected to show growth of 1.6% from 2.5% previously.

Given the country's recent credit rating downgrade by rating agency Standard & Poors to sub-investment grade, based partly on a weaker growth outlook, GDP could impact on the Rand if it varies markedly from expectations.

If it is higher, then the Rand will probably rally and vice versa if lower.

This is because a weaker economy could lead to a further rating downgrade from Moody's which is the only agency which has South Africa ranked above junk status.

A downgrade would be bad for the Rand as it would reduce the attractiveness of South Africa to outsiders as a place to invest, and lead domestic investors to seek investments overseas.

Data and Events for the Pound

The main fundamental drivers dictating price action at the moment are political in nature and focused on the twin concerns of how Brexit talks are going, and how stable the government is, and this is likely to continue in the week ahead.

The Pound rose last week on news the deadlock in Brexit negotiations had been broken, and the two sides were close to agreeing on a divorce bill, the Irish border, and citizen rights. Should this be confirmed at the mid-month European Council meeting of E.U. leaders talks will be allowed to move onto the more important subject of trade.

Yet, ultimately nothing has been confirmed and the Pound has risen on hearsay alone so there are risks of disappointment.

There is a possibility more concrete confirmation may be forthcoming in the week ahead when Theresa May visits Brussels to talk 'turkey'.

"Next week, May heads to Brussels to meet with Jean-Claude Juncker and this is her first opportunity to provide the U.K.'s divorce bill offer and to talk about their plans for the Irish border. Then on December 6th, EU ambassadors resume preparations for the summit," says BK Asset Management Managing Director and forex guru Kathy Lien.

The other main political driver impacting on the Pound is the stability of the government.

From a hard-data perspective, the week opens with Construction PMI at 9.30 GMT on Monday, December 3 which will give us insights into how the sector fared in November.

The consensus amongst analysts is that it will rise to 51.0 in November, from 50.8 in October.

Services PMI is on Tuesday at the same time and is forecast to fall to 55.0 from 55.6 previously; this is the most important reading of the week as the services sector accounts for more than 80% of U.K. economic activity.

Analysts at TD Securities think the market is underestimating the sector and a pro-Sterling result beat on expectations could be delivered:

"We look for upside risks to the November Services PMI. Spillovers from optimism in the manufacturing sector (where business-to-business activity has remained strong) as well as from the rest of Europe (where the PMIs and growth are accelerating into year-end) should help support optimism in the sector."

The week ends with the Trade Balance and Industrial and Manufacturing Data out at 9.30 on Friday, December 8.

The trade deficit is expected to widen slightly to -11.5bn in October from -11.25bn and confirm the country's hefty reliance on imports remains intact; something that concerns analysts who believe the Pound could one day have to adjust materially lower in order to balance the situation.

Both Manufacturing and Industrial production are forecast to rise by 0.1% in October; disappointment here could see Sterling end the week in soft fashion.

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