Pound vs. Rand: 16:00 Now in Sight

south african rand 2

The South African currency has gone from strength to strength following the election of Cyril Ramaphosa to the leadership of the ANC and gains are forecast to continue.

The Pound-to-South African Rand exchange rate has been in a short-term downtrend since the election of Cyril Ramaphosa as the new leader of the ANC and probably the next President of South Africa (SA), events which gave the Rand a boost in mid-December.

One Pound bought as much as R18.62 at the start of December - the month in which Ramaphosa successfully ascended to the top job in the ANC. At the start of 2018 the exchange rate is at 16.69.

GBP/ZAR has in the process fallen through a trendline (red line) on the weekly chart (see below) indicating more weakness on the horizon - although it has already fallen quite far, so the technical extent to which it could extend that decline is marginal and questionable now.

Generally, exchange rates fall an equal distance below a trendline ('b') as they did in the move down to the trendline immediately prior to the break ('a').

This seems to indicate the pair could indeed fall a little further to a target at about the 16.00 level, which also happens to be the level of the major June lows.

We would seek confirmation for a continuation lower from a break below the 16.43 lows, with a downside target at 16.05.

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More Ramaphosa-Inspired Gains for ZAR?

Whilst Ramaphosa ran on an anti-corruption relatively pro-business, reformist mandate which investors looked upon positively, the gains in the Rand also came about due to the expected departure of President Zuma who has became toxic for the Rand.

The extent to which Zuma has kept the value of the Rand down has surprised some analysts.

"I have to ask myself how much Zuma discount is in the ZAR? That might be a further 50 cents," surmised Adam Phillips, analyst at Umkhulu Consulting, quoted on Fin24.

The closeness of the election result, however, has curbed Ramaphosa's power and some have speculated that he may not be able to exercise his mandate due to counter-influence from supporters of the other main candidate for the leadership Zuma's ex-wife

Nkosazana Dlamini-Zuma is seen as the standard bearer for the continuation of Jacob Zuma's legacy and therefore broadly negative for the currency; yet due to the closeness of the race three out of the six major appointments in the ANC top brass went to her supporters.

In relation to this issue, there is an ongoing dispute over the votes for the election of the ANC secretary general, also held at the ANC summit in December.

It has been claimed by delegates from Limpopo that their votes, numbering 60, were not included in the vote for the secretary general, and if they had been, it would have resulted in one of Ramaphosa's supporters being elected rather than the actual result which saw Ace Magashule, a Nkosazana Dlamini-Zuma supporter win, instead.

The dispute over the lost votes is still ongoing and a lawyer representing the Limpopo delegates will meet the ANC leadership at Luthuli house in January.

The extent to which the influence of pro-Zuma officials in the higher ranks of the ANC might 'strangle' Ramaphosa's attempts at reform is difficult to determine but is an issue which has been raised.

Eyes Back on Credit Rating Agenices

The next major event for the currency is the decision of credit rating agency Moody's in February as to whether the country should suffer a credit rating downgrade.

If Moody downgrades SA by another notch it will be a significant event for the Rand as it will essentially mean that SA's credit rating has fallen into 'junk status' - which means it has fallen below 'investment grade', which is the bare minimum condition for inclusion in most major institutional bond portfolios.

The downgrade will make it harder for SA to borrow money with an end result that it will reduce inflows of capital, limiting demand for the Rand.
the Rand is highly inversely correlated to the US Dollar so the negative outlook for the Dollar in 2018 could provide the basis of a positive forecast for the Rand all other things the same.

The US currency is expected to struggle in 2018 amidst rising global growth which may eclipse the US growth story and lead to increasing convergence of central bank policy.

South Africa is a major commodity producer, particularly of metals, and the current rally in commodities based on falling global supply due to tighter regulation in China could also benefit the Rand indirectly.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.