Pound to Rand Overvaluation Fades in Early New Year Trades
- Written by: James Skinner
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- GBP/ZAR corrects lower toward an inflation-derived fair value
- Inflation & rate differentials suggest 19.77 to 20.32 a fair price
- Same process suggests USD/ZAR more fairly priced at 15.81
- U.S. economics in focus in quiet week for SA & UK calendars
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The Pound to Rand exchange rate entered the New Year on the back foot and with early trades pulling Sterling closer toward the 20.32 to 19.77 range it would trade in when fully discounted by the recently wider inflation and interest rate differentials between the UK and South Africa.
South Africa's Rand was an outperformer alongside the Australian and New Zealand Dollars on Wednesday with GBP/ZAR falling below the 20.30 handle and to some of its softest levels since early November.
That reflects a fair price for Sterling and the Rand if the January 2022 level of GBP/ZAR is discounted directly using the latest available inflation and interest rate differential, although a cross-currency triangulation approach to that process suggests a more appropriate price would be 19.77.
This is because of what would appear to be an overvaluation of USD/ZAR and an undervaluation of a GBP/USD, which might be more fairly priced near 15.81 and around 1.25 respectively.
"Mortgage approvals fell 11.8k in November, which was the largest ex-pandemic decline since the financial crisis, underlining our view that the UK is among a group of G10 economies where higher rates are likely to impose a greater cost," says Isabella Rosenberg, a strategist at Goldman Sachs.
Above: Pound to Rand rate shown at daily intervals with selected moving averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.
Wednesday's declines in GBP/ZAR and USD/ZAR came in what is a comparatively quiet week for UK and South African economic calendars but ahead of the release of minutes from the latest Federal Reserve (Fed) monetary policy meeting and a flurry of other U.S. economic figures.
"Chair Powell’s comments at the December FOMC press conference seemed most consistent with another step down in the pace of hikes in February," Rosenberg and colleagues write in a Wednesday market commentary.
"As a result, we will be looking for more detail on the Committee’s views on the pace of hikes at future meetings, as well as any additional color on the higher inflation projections," they add.
Friday's non-farm payrolls figures will watched closely for inisght into the pace at which the job market is cooling in response to 2022's increase in interest rates, which saw the Fed Funds rate rise from near zero to 4.5%.
This and the resilience of the broader economy are likely to be important influences on the pace of increases going forward after the median and mean average of Federal Open Market Committee forecasts suggested borrowing costs could rise to anywhere between 5% and 5.5% this year.
The pace of increase in the Fed Funds rate and the overall level at which it ends up at are likely to be prominent influences on appetite for the U.S. Dollar and other currencies in the months ahead.
"It feels like tactical trading is the way of it for now and in that sense we have some protagonists today with ISM, JOLTs and the Minutes," says Beatriz Antunes, an analyst on the FX spot trading desk at J.P. Morgan in London.
"Little to update on in terms of sterling, the Times is reporting analysis that the reduction in wholesale energy prices could allow the Government to shelve a planned bill hike in April," she adds in a Wednesday desk commentary.
Above: Pound to Rand rate shown at weekly intervals with selected moving averages and 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.
