Pound-to-South African Rand Rate in the Week Ahead: Declining in Line With Dominant Downtrend

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- Bias is for continuation lower in GBP/ZAR

- Brexit vote to drive Sterling

- SARB decision, global sentiment to impact Rand

The Pound-to-South African rand exchange rate is trading at 17.80 at the start of the new week, virtually unchanged from a week ago.

From a technical perspective, the GBP/ZAR exchange rate is in a broader technical downtrend that has been live since the late December 18.66 highs were rejected.

Given the old dictum that the ‘trend is your friend’ we expect this bearish drift to persist, with a break below the 17.50 lows confirming a continuation down to a target at 17.30-35 and the lower border of the wedge pattern which has formed since 2017.

The pair has now broken below the 50 and 200-day moving averages (MA) which is a bearish sign and suggests a continuation lower.

Momentum, as measured by RSI, is neither particularly bullish or bearish.

The short-term downtrend is clearly visible on the 4-hour chart which highlights the declining sequence of peaks and troughs, or lower highs (LH) and lower lows (LL).

This further reinforces the bearish bias evident on other timeframes.

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The South African Rand: What to Watch this Week

Global factors will likely be key for ZAR over coming days with the currency enjoying the improvement in overall investor sentiment seen thus far in 2019.

Emerging market (EM) currencies have, since the beginning of this year, largely gained ground to the dollar, with the Brazilian real, Russian ruble and Rand amongst the biggest gainers so far, recouping some 2018 losses," says Shireen Darmalingam, an Economist at Standard Bank.

A central driver of the Emerging Market recovery has been signs of intent by the U.S. and China to solve their trade dispute, a slowdown in Chinese economic activity and falling export figures have given a great incentive to China to sit down and negotiate with the Americans. Markets believe a deal will ultimately be struck, and this is proving beneficial to the Rand.

"EM currencies will continue taking their cue from the global trading environment," says Darmalingam.

The main domestic event in the week ahead for the Rand is the South African Reserve Bank’s (SARB) policy decision on Thursday, December 17, at 13.00 GMT.

The SARB hiked rates by 0.25% to 6.75% in November but it is not forecast to do the same in January according to consensus estimates.

More important than what it does, could be what it says in its statement and whether it revises its current growth and inflation of 1.9% (for growth) and 5.5% (for inflation).

“We do not expect the SARB to hike rates again soon as there are still a number of downside risks to both the growth and inflation trajectories. We are, however, interested to see whether the SARB will revise its outlook for inflation and economic growth. As it stands, the SARB expects inflation to average 5.5% in 2019, and GDP is expected at 1.9%,” says Darmalingam.

The Pound: A Big Week for Brexit Politics

By far the most important event in the week ahead is the vote on Theresa May’s Brexit deal, scheduled for Tuesday 15, at 19.00 GMT. The outlook definitely favours the government to lose, and it is more a question of ‘by how much’ rather than ‘whether’.

The Pound's reaction will therefore likely depend on the size of the loss, and what comes next. If the loss is large - defined by a 100 or more MPs - as some analysts believe, it might signal the death of the government’s deal and could prompt a knee-jerk move lower in Sterling.

"Very few commentators expect the deal to pass, so the move in GBP would likely be limited on that news alone," says Jordan Rochester, analyst with Nomura. "But we would be looking at the size of the defeat to understand whether a repeated vote could get over the line."

The expected defeat would probably lead to a vote of no-confidence in the government, called by the Labour Party with Labour leader Jeremy Corbyn telling the BBC's Andrew Marr on Sunday that he would call the vote soon. But we don't see the government losing such a vote as the DUP and Conservative party would unite to defend their hold on power.

"We’d expect the government to win a vote of no confidence as turkeys rarely vote for Christmas," says Nomura's Rochester.

We think the government will ultimately rework the Brexit deal and bring it back to parliament for a second airing, and there is talk of some EU concessions being made available to help the deal cross the line on a second vote.

While there is a majority in Parliament who are committed to avoiding a 'no deal' Brexit, as proven by last week’s finance bill vote, there is not necessarily a majority to command an alternative plan. That said, a report in the Sunday Times reports Downing Street uncovered a bombshell plot by senior MPs to seize control of Brexit negotiations and sideline the prime minister. At least two groups of rebel MPs are plotting to change Commons rules so motions proposed by backbenchers take precedence over government business, upending the centuries-old relationship between executive and legislature.

This in effect could see Brexit delayed, cancelled or another Norway-style Brexit delivered. All scenarios lead to a softer Brexit which is good for Sterling. However we would be seriously worried for the long-term stability of UK politics if such a coup were to take place. 

Last week's reports that a large portion of Labour Party MPs are open to supporting the deal if they can secure their own changes is a significant shift in the debate we believe: if these MPs secure some changes to the deal, a softer Brexit is in sight, which represents an all-out positive for Sterling.

Last week's report the government is considering a delay to the Article 50 process is also notable in that it suggests government ministers are aware that all alternative Brexit scenarios that would follow the failure of May's deal, would need more time to formulate and execute. While the reports were officially denied by 10 Downing Street we believe this a case of where there is smoke, there is fire.

“Perhaps the best-case scenario for the Pound, barring the deal passing in parliament, would be a delay to the article 50 process. This decision would have to be agreed by the EU, however they are likely to do so, with the Pound set to appreciate due to the removal of the pressure of hitting the 29th March deadline for exiting the EU,” says Michael Brown, Senior Analyst at Caxton FX.

Brexit aside, the two main economic releases in the week ahead are inflation out on Wednesday and retail sales on Friday. Of the two, analysts think the latter is most likely to have the greater impact on Sterling.

“With the Bank of England not expected to raise interest rates unless Parliament approves a smooth Brexit, the inflation data is unlikely to have much impact in currency markets. Retail sales on the other hand could see a stronger response by traders as it’s a better gauge of UK growth momentum,” says Raffi Boyadjian, an analyst at broker XM.com.

Retail sales are forecast to show a -0.7% fall in December according to consensus estimates. If so the Pound could fall due to a drop in expected Q4 growth.

Wednesday’s inflation data, meanwhile, is expected to show a rise of 0.2% month-on-month (Mom) and 2.2% compared to a year ago, when it is released at 9.30, with little changed from the previous print. The higher the result the better for the Pound and vice-versa.

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