Pound / South African Rand: Awaiting the Breakout
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- Narrowing ranges open door to potential breakout move
- Trendlines still fencing exchange rate in
- ZAR eyes SARB meeting this week
The Pound-to-South African Rand rate is trading at 18.40 at the time of writing, after declining a third of a percent in the previous week in which it pierced the April lows.
From a technical perspective, the pair remains trapped between to major trendlines and is trading within the steadily narrowing space within the apex of these two trendlines (A & B) but eventually, it will probably breakout higher or lower, and that will determine the next directional phase of the trend.
The break below the 18.15 lows suggests a bearish tilt to the forecast, although a continuation lower would be dependent on a break below 18.00. If that were to happen, however, it would probably see a move down to a downside target at 17.50.
Until one of the major trendline which is boxing price in is broken the trend could go in either direction and despite the bearish directional bias, we see a possibility of an upside breakout happening too. A move above the 19.08 May highs would provide confirmation of a continuation up to a target at the 19.40 March highs.
Note though that this sideways slide could go on for a while yet, and it could be well into June that we see this breakout.
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The South African Rand: SARB in Focus
The main event on the horizon for the Rand is probably the policy meeting of the South African Reserve Bank (SARB), at which the monetary policy committee, which is tasked with setting base interest rates, is not expected to alter the current 6.75% rate, when the meeting concludes at 14.00 BST on Thursday, May 23.
Given the interest rate is not expected to change any impact on the currency is likely to stem from changes to the SARB’s economic forecasts. If they expect lower growth of inflation the Rand will probably suffer.
Other key data out next week it April CPI, with a consensus forecast remain unchanged at 4.5% compared to a year ago (year-on-year). Standard Bank economists expect higher inflation of 4.6% year-on-year, but ABSA Bank expects slightly lower than forecast CPI of 4.4% year-on-year.
“We forecast headline CPI inflation to ease slightly to 4.4% y/y in April from 4.5% in March as base effects from the 1 pp VAT increase last April will likely offset higher fuel price inflation,” says Peter Worthington, an analyst at ABSA.
Perhaps more importantly for the Rand is a potential 5.0% decline expected at the end of the month due to MSCI EM equities index re-weightings, which will reflect the inclusion of more China A-shares but at the expense of South African equities.
“Based on the SA’s equity outflows in the months of the last MSCI re-weightings, passive investors will likely sell between USD1.5bn to USD3.0bn worth of JSE-listed shares at the end of May, which poses an upside risk to our ZAR14.50/USD mid-year target. Specifically, we believe the ZAR will weaken by 2% against the USD, but if global risk aversion is high on 29 May, due to factors such as heightened global trade tensions, resultant ZAR depreciation could be closer to 5%,” says Worthington.
The SA Rand is also heavily influenced by external factors, world risk trends and especially the U.S. Dollar to which it is negatively correlated.
To this end, the U.S. Federal Reserve meeting minutes out on Wednesday at 19.00 could be key as it may provide clues and clarity on the Fed’s wait-and-see stance.
Some Fed policymakers have indicated that they could lower interest rates if inflation does not pick up.
Fed presidents from Richmond, Boston, and Minneapolis have gone further and expressed concern over whether a prolonged trade conflict might warrant a policy response because of the negative impact on the economy.
If the minutes appear to pitch the Fed in even a marginally more dovish (meaning in favour of lower rates) direction it will probably impact negatively on the Dollar.
The market is seeing a higher probability of a rate cut than a rise so is dovish compared to the Fed, according to Fed fund futures, which calculate a 73.4% probability of a cut by the end of the year.
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