South African Rand Rally Driving GBP/ZAR Toward November Low 

"Chinese market responded positively today (and before the quote about avoiding excessive curbs), with equities closing firmer and USD/CNH retracing all, and then some, of gains recorded yesterday," - CIBC Capital Markets

© Lefteris Papaulakis, Adobe Images

The South African Rand was an outperformer among comparable currencies early in the new week when rallying against the Dollar and pushing the Pound back toward its early November lows though the risk is of a midweek rebound in U.S. exchange rates that could see GBP/ZAR bounce over the coming days.

Rand gains built and its outperformance followed in the wake of Statistics South Africa figures suggesting the labour market healed somewhat in the third quarter when a larger than anticipated number of South Africans found their way back into employment, pushing the jobless rate lower than was expected.

"Notwithstanding, the better than anticipated outcome, the unemployment rate remains elevated, evincing the fragility of the South African economy which is plagued by ongoing rotational load sheeding, significantly impeding activity and weighing heavily on confidence and investment," writes Lara Hodes, an economist at Investec, in a review of Tuesday's data. 

South Africa's Rand also benefited notably on Tuesday alongside the Brazilian Real and Russian Rouble as China's Renminbi rallied sharply from its Monday low, prompting other currencies to follow suit while appearing to weigh broadly on U.S. Dollar exchange rates in the process.

The result for the Pound was another leg lower and extension of the Monday decline in GBP/ZAR, which was fast approaching its early November low and could trade as far down as 20.20 in the days ahead if the influential USD/ZAR exchange rate unravels further.

Above: Pound to Rand rate shown at daily intervals with 55-day moving-average and Fibonacci retracements of October rally indicating possible areas of technical support for Sterling. Click image for closer inspection.  

USD/ZAR is an important influence on all other Rand exchange rates including GBP/ZAR, which tends to reflect the relative performance of the Rand and Sterling when each is measured against the U.S. Dollar and would be likely to remain under pressure in the days ahead if USD/ZAR continues to fall. 

GBP/ZAR would trade near to 20.20 if USD/ZAR falls down to the 16.65 area and into the nearest pocket of technical support levels on the charts.

"We will be watching the increased Covid infections from China, as their zero-Covid policy could severely dampen South African exports to the country," says Sebastian Styne, an FX risk and hedging specialist at Sable International.

"In addition, with the multitude of US data releases as well as the Rand’s strength in recent weeks, the currency is vulnerable to a reversal in sentiment," he adds in a Monday contemplation of the outlook for the Rand.

The Rand benefited on Tuesday in price action that many analysts attributed to developments in China but may have to navigate headwinds from elsewhere in the world later this week when market attention turns back to the Federal Reserve (Fed) and data emerging from the U.S. economy.

Above: USD/ZAR shown at daily intervals with Fibonacci retracements of April and August rallies indicating possible areas of technical support for the Dollar. Selected moving-averages and upward sloping trendline denote possible support and resistance. If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here. 

"Chinese authorities are quite clearly working harder on economic support, and notably appearing to be stepping back from the harshest of restrictions, saying today ‘officials must keep avoiding excessive COVID curbs'," says Patrick Bennett, head of Asia FX strategy at CIBC Capital Markets.  

"Chinese market responded positively today (and before the quote about avoiding excessive curbs), with equities closing firmer and USD/CNH retracing all, and then some, of gains recorded yesterday," Bennett adds. 

Despite the optimistic mood in the markets, there has been no change in the government's policy of attempting to vanquish the coronavirus from China, meaning that continuing restrictions and further rounds of related economic closures cannot be ruled out for the weeks and months ahead.

Meanwhile, Wednesday's third quarter GDP report and Friday's non-farm payrolls number for November will each offer important insights into the U.S. economic outlook and are set to be insterspersed with a keynote speech from Federal Reserve Chairman Jerome Powell. 

Any of these could revive either the rally in U.S. bond yields or market appetite for the perceived safe-haven that is the U.S. Dollar with adverse implications for other currencies including the likes of the Rand and Pound Sterling.

"Chinese markets have rebounded after a strong police presence across major cities seems to have put a lid on COVID-19-related demonstrations. Higher- rate fears and a worsening earnings outlook were the reasons for the selloff in the US last night," says Walter de Wet, a currency strategist at Nedbank.