South African Rand Could Lose Ground vs. Sterling Near-Term as Bigger Range is Respected

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- GBP/ZAR to start recovery within a range

- Possible breakout higher in the long-term

- Global macro events the main driver of the Rand

The Pound-to-Rand rate exchange rate is trading at 18.23 at the time of writing, barely unchanged from the middle of last week, but studies of the charts still suggest there is a chance of a recovery unfolding within a broader range over coming days.

The pair recently fell to the floor of a long-term range at 18.04, on June 20, and bounced. We forecast the pair will probably recover and rise back up within its medium-term range. The next target to the upside is 18.60, with a rise to that level conditional on a break above 18.37.

The 4hr chart above is used to analyse the short-term trend, which means the next 5 days or week of trading activity.

The daily chart merely reaffirms the sideways nature of the trend. It shows how the pair has repeatedly fallen and risen in three-wave (abc) zig-zags of price action ever since it started trending sideways in March 2019.

The RSI indicator in the bottom panel - which tells us whether momentum in the exchange rate is either positive or negative - appears to have hit a ‘floor’ of support at the same time as the price and also looks poised to rebound higher.

If momentum rises there is a good chance prices will as well.

Overall we see a probable recovery getting underway and reaching a target at 19.00 eventually over the medium-term, conditional on a break above the 18.27, June 19 highs.

We use the daily chart above to analyse the medium-term trend which includes the next 1-4 weeks of price action.

The weekly chart shows the sideways range within the context of broader market action. The pair is rising in a channel over the long-term which gives the overarching trend a bullish bias.

This bullish bias over the long-term could suggest the pair might break out of the range to the upside eventually and perhaps hit the key target at 20.00.

The weekly chart is used to analyze the long-term forecasting horizon, defined as between 1-4 months into the future.

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The South African Rand: What to Watch this Week

The only significant domestic data release of note for the Rand is the publication of the South African Reserve Bank’s (SARB) leading indicator for April, which is expected to have ticked up to 104.9 pts from 104.5 pts in March, when it is released on Tuesday, June 25.

The indicator has not been giving positive leading signals for the country’s economy for half a year now and the negative trend is expected to continue in April.

“The year-on-year growth in the leading indicator has been declining for six consecutive months, implying a bleak economic outlook,” says Thanda Sithole, an economist at Standard Bank. “The current business cycle downturn, which started in December 2013, is the longest in the history of SA’s economic downturns.”

Clearly, another negative reading in line with previous results would not be very supportive of the SA currency.

The main driver of the Rand is likely to be geopolitical or macroeconomic in origin.

The meeting of the G20 on Friday, June 28, is one event which is likely to have global repercussions and could move the Rand.

Given the wide divergence in negotiating positions and the complexities of the issues, which encompass national security as well as trade, it now seems unlikely a solid trade deal will be agreed between the U.S. and China any time soon.

Indeed, a return to the ‘way things were’ seems highly unlikely. The way things are right now could be more reflective of the ‘new normal’ going forward.

China has clear red lines which are unrealistic, making a full trade deal with the U.S. unlikely in the near term.

The first is the removal of all tariffs - something the U.S. is 100% against.

The second is for U.S. expectations of Chinese purchase of U.S. exports to be “realistic” when in actual fact the U.S. wants them to be 'optimistic'.

The third is that China will not submit to intrusions on ‘national sovereignty’, which relates to the requirement from the U.S. that it enshrines the trade agreement in domestic Chinese law.

It is unlikely, therefore, that there will be a major breakthrough in trade talks at the G20, and what is more likely is that leaders will mouth platitudes paying lip-service to international diplomatic norms, announcing perhaps a renewed commitment to a further series of talks but nothing more concrete.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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