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The Pound to South African rand exchange rate rallied further off year-to-date lows to open the new week and the author’s model suggests it's likely to remain buoyant above 23.50 in the days ahead, and that gains should fade around 23.80 even if global markets remain under pressure.

GBP/ZAR rose close to two percent on Monday to regain its 200-day moving average around 23.55 amid a further meltdown in global markets arising from heightened conflict risk in the Middle East, and a recent run of poorer-than-expected US economic figures that has stoked fears for the global economy.

This has favored low-yielding funding currencies like the Japanese yen and Swiss franc while weighing heavily on high beta and high carry counterparts like the South African rand and Mexican peso, which had been propped up by a persistent appetite for carry through the opening half of the year.

“The havens JPY and CHF have surged, which in turn has led to outsized losses in the global carry trade, with MXN and ZAR racking up huge losses,” said Dr Win Thin, head of global markets strategy at Brown Brothers Harriman. “We cannot stand in the way of this move. However, we believe fear has led markets to ignore the fundamentals. Recent data suggest that the U.S. is slowing but is not yet nearing recession.”

Above: Pound to Rand exchange rate shown at daily intervals with Fibonacci retracements of 2024 downtrend indicating possible areas of technical resistance.

The mood in global markets and appetite for risky assets are likely to remain the dominant drivers of GBP/ZAR through the week ahead owing to a dearth of meaningful data in the UK and South African economic calendars.

This could see GBP/ZAR remain buoyant above the 23.50 level and perhaps even its 200-day average at 23.55, though rallies are likely to fade ahead of the 61.8% Fibonacci retracement of the 2024 downtrend at 23.82.

The buoyancy of GBP/ZAR is derived more from the rally in USD/ZAR than it is from the performance of Sterling, which underperformed most other major currencies last week after the Bank of England announced its first interest rate cut of the cycle, which was not fully priced in at the time.

“We expect USDZAR to continue to trade in line with its historical beta to the USD, as we do not expect any major local shocks,” Barclays strategists said in a Sunday note to clients. “Global risk-off sentiment can weigh on the currency if hard landing concerns intensify.”

Above: USD/ZAR shown at daily intervals with selected moving averages and Fibonacci retracements of the April 2024 downtrend indicating possible areas of technical resistance.