South African Rand Recovery Steering GBP/ZAR toward Waters Below 21.0

"NZD, GBP, KRW, THB screen as the most overbought currencies we track...INR, CAD, IND, ZAR, and HUF look oversold" - TD Securities.

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The Pound to Rand exchange rate retreated further from one year highs early on this week and appeared set to test the waters beneath the 21.0 level but international market conditions and next week's events in the U.S. will be key to just how far below there GBP/ZAR can go into year-end. 

South Africa's Rand was an outperformer among G20 currencies on Tuesday as the U.S. Dollar softened across the board and after Statistics South Africa said the local economy had expanded by 1.6% during the third quarter and at an annualised pace of more than 4%.

"Going forward however, modest “declines in critical crop harvests such as maize, production challenges in the sugar industry, trade friction in fruits, vegetables, beef and wool, as well as widespread foot-and-mouth disease” could weigh on the full year’s performance, according to Agbiz," says Lara Hodes, an economist at Investec. 

"Moreover, the mining sector remains susceptible to slowing global growth and accordingly demand," Hodes writes in a research review of Tuesday's data. 

Last quarter's performance was far stronger than many economists had expected but also partly the work of severe flooding in the prior quarter, which caused severe damage and loss of life at the same time as it led to economic disruption and mechanical bounce in third quarter GDP.

The Rand's strong start to the week has further reversed the steep sell-off resulting from earlier speculation about the future of President Cyril Ramaphosa.

Above: Pound to Rand rate shown at daily intervals with Fibonacci retracements of last week's Rand sell-off indicating possible areas of technical support for Sterling. Click image for closer inspection. 

"It was announced that not only will Ramaphosa not resign, but he also wants to run for another term as president. This will put the ZAR on the front foot this week as Ramaphosa has investor support and there is a lack of any other suitable candidate to replace him," says Sebastian Steyne, an FX risk and hedging specialist at Sable International.

While the domestic backdrop has turned more supportive of the Rand, it has also benefited from favourable declines across the Dollar exchange rate complex and a continued softening of U.S. government bond yields.

This is after both the Dollar and yields were unable to capitalise on last Friday's data suggesting that U.S. job creation continued at a robust pace in November with annual wage growth picking up further above 5%.  

That could be interpreted by the Federal Reserve (Fed) as an upside risk to its outlook for inflation and interest rates, however, which would matter for the Rand and Sterling as these currencies have benefited alongside many others from the heavy selling of Dollars seen over the course of November. 

"The USD stumbled again last week, reflecting the easing of FCI [financial conditions indicators] that accompanies the scaling down of Fed rate hikes," says Mark McCormick, global head of FX strategy at TD Securities. 

"A shift in momentum signals could keep the USD on the back foot in the very short-term. Yet, USD downside looks contained ahead of November CPI and the Fed meeting," McCormick and colleague writes in a Monday research briefing. 

Above: Pound to Rand rate shown at daily intervals with selected moving-averages and Fibonacci retracements of recovery from September low indicating possible areas of technical support for Sterling. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

Recent Dollar losses and gains for riskier currencies like the Rand came with U.S. inflation having eased from recent highs in October and Fed officials appearing to confirm they are likely to lift interest ratess in smaller increments going forward, all of which played out amid speculation about a possible reopening of the Chinese economy.

However, Chairman Powell and some other policymakers were also also clear last month that U.S. economic data could yet lead the Fed to raise interest rates over and above the 4.75% level that was tipped as the likely peak in September's round of Federal Open Market Committee forecasts (FOMC).

Chairman Powell was clear even before last week's payrolls number that earlier data had already convinced him rates should be raised further and the prospect of other FOMC members joining aligning with him next week is something that could limit the Rand's ability to rise further against the Dollar in the days ahead.

This could also potentially limit any further declines in the Pound to Rand exchange rate too as it tends to be positively correlated with the U.S. Dollar.

"We're wary of chasing the USD move ahead of the November CPI and December Fed meeting [next week]. NZD, GBP, KRW, THB screen as the most overbought currencies we track," says TD Securities' McCormick.

"On the flip-side, INR, CAD, IND, ZAR, and HUF look oversold," he adds.

Above: Pound to Rand rate shown at weekly intervals with Fibonacci retracements of 2020 downtrend indicating possible areas of technical resistance for Sterling and shown alongside USD/ZAR. Click image for closer inspection. 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.