Pound-Rand Exchange Rate Seen in 20.75 to 21.32 Range This Quarter 

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• GBP/ZAR spot rate at time of writing: 20.95
• Bank transfer rate (indicative guide): 20.22-20.36
• FX specialist providers (indicative guide): 20.64-20.80
• More information on FX specialist rates here

The Pound-to-Rand exchange rate advanced on Wednesday, building on an already handsome gain for the week as it lifted off from a likely range floor for the second quarter and South African exchange rates softened alongside investors' appetite for assets like stocks and commodities. 

South African exchange rates were a mixed bag after the Rand ceded ground to all majors except the Australian and New Zealand commodity Dollars while also underperforming relative to many major emerging market counterparts.

The recovery of stock and commodity prices appeared to lose steam Wednesday although despite this the Rand did gain over other recent underperformers including the Turkish Lira, Brazilian Real and Mexican Peso.

South Africa's currency also remained close to 18-month highs against the Dollar, despite the intraday increase in USD/ZAR.

"Market realisation that the Budget still portrays a poor fiscal outlook for SA, despite the slight improvement in debt and deficit projections, has weakened the rand back to around R15.00/USD, which it will likely average for this quarter," says Annabel Bishop, chief economist at Investec. 

South Africa's currency has pushed the U.S. Dollar back to levels not seen since September 2019 this year while also giving a resilient account of itself thus far in 2021 against an outperforming Pound Sterling.

The Rand is forecast by a range of analysts to sustain itself near recent highs against the Dollar but could see losses against the Pound, which is now widely expected to win back more previously lost ground in the months ahead. 

Above: Pound-to-Rand rate shown at hourly intervals alongside USD/ZAR (blue line).

Rand weakness comes in the wake of a 2021 budget that had initially received a warm response from the market when Finance Minister Tito Mboweni told parliament government debt is now expected to stabilise at 88.9 per cent of GDP in 2025/26 before declining thereafter.

That was an improvement on the outlook as it stood at the time of October's medium-term budget plan, although one that does little to change the picture around South Africa's credit rating, which was cut to 'junk' at all major rating agencies following last year's February budget. 

Investec forecasts USD/ZAR to trade around 15.0 this quarter before edging higher later in 2021 which, when combined with an improved outlook for Sterling elsewhere, points the Pound-to-Rand rate higher in the short-term. Sterling would trade as high as 21.32 as soon as this quarter if the main Sterling exchange rate GBP/USD makes it as far as the 1.42 penciled in by BMO Capital Markets while USD/ZAR averages the 15.0 anticipated by Investec.

"We look for the GBP to claw back more of its earlier losses over the next 3M as non-resident investors rebuild their UK exposures. Our 3M GBPUSD and EURGBP views are 1.42 and 0.8590, respectively. The UK’s successful vaccine rollout puts the economy in a relatively good spot," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "During the last 5-year period, the GBP has not been a key beneficiary of the steady decline in the USD’s share of global FX reserves. There is scope for this to change, particularly if the USD’s share continues to drop, or if reserve managers reduce their allocations to ultra-low-rate currencies such as the JPY or the EUR."

A Pound-Rand rate of 21.32 would be Sterling's best since October that reflects a moment in the sun for Sterling after a headstart in the vaccination race made the UK a contender for outperformance and enabled the Bank of England (BoE) to relax about outlook for the economy and interest rates. 

Above: Pound-to-Rand rate shown at 4-hour intervals alongside USD/ZAR (blue line).

The improved interest rate and economic outlook has boosted investor demand for Sterling just as it also appears to benefit from interest among central bank reserve managers, which is an upside risk to forecasts for the main British exchange rate GBP/USD and in turn, GBP/ZAR. 

"The pro-cyclical nature of EM currencies appears to be behind notable gains by some in recent months. Capital inflows to EMs have accelerated despite low policy rates, and reserve accumulation has been significant – again part of the typical pro-cyclical pattern," says Adam Slater at Oxford Economics. "The picture will become more challenging for EM FX as 2021 wears on. EM FX also now faces a potential threat from surging US bond yields. If world growth and inflation surprise to the upside this year, triggering sharp further gains in commodity prices, EM currencies could yet post significant further gains. But it makes sense to be cautious about picking which EM currencies might be the winners. Comparing the procyclicality of EM currencies with our measure of sovereign risk, the most attractive currencies are the Russian ruble, Mexican peso, Indonesian rupiah, and Colombian peso. Riskier pro-cyclical currencies include the Turkish lira, Ukrainian hryvnia, and South African rand."

The Rand meanwhille had enjoyed a period of outperformance until a sell-off in the U.S. government bond market became disorderly last week, leading to a USD/ZAR rally that has also helped GBP/ZAR find its feet around 20.75. However, the domestic backdrop has improved with recent government moves to reduce restrictions on economic activity, begin vaccinating the population and to maintain a longrunning effort to improve South Africa's public finances. 

"The rand continues to straddle the 15 to the dollar level but, unlike yesterday, is likely to favour levels above 15 on dollar strength and market caution," says Siobhan Redford, an economist at Rand Merchant Bank. "The PMI and vehicles sales together continue to reflect the vulnerability of SA’s economic recovery. It is likely to feel a bit like a one-step-back day, but don’t forget to look at the progress we have made thus far. It has been a tumultuous journey, but we are definitely better off than a few months ago."

Above: Pound-to-Rand rate at daily intervals alongside USD/ZAR (blue), S&P 500 futures (green) and CNH/USD (orange).