Pound's Downtrend Against the South African Rand Likely to Extend

Image © Andrey Popov, Adobe Stock

- GBP/ZAR in established downtrend since October

- Yet now at ‘hard floor’ of 200-day and 50-week MAs  

- Brexit deal passage key for Pound; geopolitics and trade for Rand

The Pound-to-South African Rand rate is trading at 17.81 at the time of writing - up slightly from the 17.73 close of the week before.  

The short-term trend is however still one of weakness so we would expect any strength in Sterling to ultimately peter out and the downtrend to resume.

A break below the 17.20 July lows would provide confirmation of such a continuation with the next target at the 16.75 trendline.

The pair is currently trading at the level of the 200-day moving average (MA) which is acting as a sort-of support floor. MA’s often supply this function. Wholesale reversals also often occur at the level of MA’s, increasing the risks of a change of trend at this level.

Overall, however, there has not been enough of a recovery yet to suggest such a new trend is starting.

Another impediment to more downside is the 50-week MA situated at 18.88. This too is likely to provide support for the exchange rate and would need to be broken to provide evidence of a continuation of the downtrend.

Longer-term things are more opaque as the pair has been rising in a long-term channel ever since bottoming in March 2017 at the 15.50 lows.  

At the time of writing the GBP/ZAR rate is quoted at 17.78 with UK high-street banks offering rates of between 17.29 and 17.16 for international payments while independent providers are offering in the region of between 17.62 and 17.66.

The South African Rand: What to Watch

The Rand remains most sensitive to exogenous factors such as global risk appetite and the strength of the US Dollar. There is a risk to the Rand in the near-term from a rising Dollar due to rising trade tariffs.

This could actually suggest an upside risk to the exchange rate from fundamentals which would see a reversal of the technical short-term downtrend and a bounce from the floor supplied by the MAs.

US President Trump recently threatened to revisit the possibility of increasing tariffs on European imported cars after he criticised General Motors for threatening to lay off thousands of workers in the US.

Such a move would probably strengthen the US Dollar and increase global risk aversion by reawakening fears of a trade-war-induced global economic slowdown. This would also probably weigh on the Rand which is sensitive to global risk trends.

The US’s plan to automatically increase tariffs on $250bn of Chinese imports is another risk to the Rand. The rise in tariffs is set to kick in on 1st of January 2019. There is a possibility it might not go ahead if the US and China resume trade talks.

The G20 summit at the end of this week may be key in this respect. It has been highlighted as the possible event for the two superpowers to reopen a dialogue. Both president’s Xi and Trump have indicated they are open to having talks at the event. It now remains to be seen whether anything concrete will come of them.  

On the hard data front, the most recent release for the Rand has been consumer confidence in Q3 which showed a fall in the balance from 22 to 7. Whilst a positive figure still shows overall optimism, the margin has fallen. The fall may be as a result of higher petrol prices linked to the price of oil weighing on household budgets, according to Peter Worthington, an economist at ABSA.

Business Confidence, meanwhile, has shown a slight fall from 34 to 31 in Q4. Both these sentiment indicators often provide early clues as to general trends in the economy itself.

On the horizon lies the balance of trade result for October, which is out on Friday at 12.00 GMT, and is expected to show a deficit of -$2.25bn. Also out is M3 money supply and private sector credit on Thursday at 6.00 GMT.

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