SA Rand Strengthens vs the Pound, Also Sees Relief Against USD and EUR

The marginally weaker-than-expected US employment figures released in the first week of November have brought much needed relief to South Africa's Rand exchange rate complex.

If we step back from the recent volatility, "we can see that the overall environment is back to what it was in August and September. By this we mean that the strength in the US economy is the dominant issue driving the rand, the link being between strong growth and a strong dollar and more pressure for the Fed to hike," notes John Cairns at Rand Merchant Bank.

At the time of writing we see South Africa's currency continuing its advance on global foreign exchange markets:

• The British pound to South African Rand (GBP/ZAR) exchange rate conversion is seen 0.99 pct higher on a day-to-day basis having reached 17.6951.
• The euro to South African Rand (EUR/ZAR) exchange rate conversion is seen 0.63 pct lower at 13.9180.
• The US dollar to South African Rand (USD/ZAR) exchange rate conversion is 0.02 pct lower at 11.2236.

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Furthermore, you should avoid negative currency moves by ensuring the correct risk controls are in place.

US Payrolls Give Relief to Risk Currencies, Including the ZAR

Momentum remains positive for ZAR at the time of writing with further gains being possible in the current vacuum of important market news.

According to Cairns the Rand was in danger of spiralling lower:

"The 214,000 increase in US non-farm payrolls was only slightly below expectations but the slight disappointment was enough to significantly dampen global markets exuberance and fears.

"Both US bond yields and the dollar fell significantly after the release: the 10-year yield dropped from 2.40% to under 2.30%, while EUR/USD bounced from a 1.2358 low to 1.2480.

"These moves, in turn, have brought significant relief to risk currencies that had looked on the verge of spiralling weaker.

"Chinese data released over the weekend and this morning should be seen as marginally rand positive. Exports jumped 15% y/y (although many are saying that the number has been manipulated), showing the economy continues to expand nicely, while inflation came in at just 1.6%, pointing to the possibility of additional stimulus."

Looking at the technicals, USD/ZAR has failed in the high-11.30s three times this year.

"Each failure entrenches the level further. However, risks of a break have certainly not disappeared. The main threat remains EUR/USD. Ever since the Fed meeting two weeks ago the pair has looked set to run lower but the move has never gathered momentum," says Cairns.

Event risk is low for most of the week but Friday could see significant volatility because of the Eurozone 3Q14 GDP numbers.

The Eurozone as a whole is expected to have grown marginally, while France and Germany and expected to have escaped technical recessions.

The weak figures will keep the pressure on the ECB to act on quantitative easing.

South African Econonomic Pointers Ahead

Data releases this week should affirm that GDP growth rebounded in 3Q14.

RMB say their preliminary forecast of 1.4% annual growth is premised on a rebound to 1.3% q/q GDP growth in 3Q14 and a much stronger rebound to 3.9% in 4Q14.

Bear in mind that the rebasing, reweighting and reclassification of the GDP survey, scheduled for release on the 25th of November, will likely result in higher growth rates.

Manufacturing, retail and mining surveys are scheduled for release this week.

Mamello Matikinca at RMB tells us what levels to watch out for:

"While the PMI may have contracted in September, the trend has nonetheless continued to improve. This suggests that manufacturing production should have rebounded in September, rising to 4.8% y/y from -1.2% in August. Production should have been boosted by low base effects from the strikes in the automotive sector last year and higher exports as indicated by the SARS trade figures.

"We expect retail sales to have accelerated from 2.1% y/y to 4.3% in September. This may be attributed to low base effects. While the drivers of consumer spending continue to suggest that spending should remain muted in the medium-term, the slight improvement in household credit demand and declining inflation profile should have been supportive of retail sales growth in the month.

"On annual basis, growth in mining production should have remained weak. We have pencilled in a slowdown to 0.3% y/y in September from 2.1%. However, on a month-on-month basis, the rebound in platinum production should have translated into a 2.9% m/m improvement in production."