Softer Rand and Stronger Sterling Brings 22.00 into View for GBP/ZAR

 "We've seen some interest to fade the move, likely driven by tactical profit taking in shorts" - Citi 

Image © Eskom SOC

The Pound to Rand exchange rate built further on recent gains early this week and could have scope to reach two-year highs around the 22.0 handle up ahead if economic data remain conducive to a stronger Sterling and softer Rand, or if the U.S. Dollar rebounds from nascent losses. 

South Africa's Rand rebounded from multi-month lows against a softer Dollar on Tuesday but lost ground to a stronger Sterling, leading GBP/ZAR into a fifth successive day of gains and placing it within a short distance of 22.0 ahead of January's U.S. inflation report. 

The Rand had come under widespread pressure to open the new week in price action that some observers attributed to rating agency commentary about the possible financial and political implications of righting the capsized ship that is national electricity monopoly Eskom. 

"USDZAR traded back on the 18 handle thanks to the latest Moody headlines," says Rui Ding, EMEA content lead at CitiFX Wire. 

"We've seen some interest to fade the move, likely driven by tactical profit taking in shorts. Indeed, Citi Ceemea Strategy has closed their short ZAR trade recommendations on a tactical basis, as levels now reflect concerns," she adds.

Above: GBP/ZAR shown at daily intervals with selected moving averages and featured alongside USD/ZAR. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

The Rand was sitting in the middle of the G20 league table on Tuesday but remained the underperformer of the recent week, month and the new year. 

"The markets did not seem to take this SONA address very well as the ZAR weakened approximately 2.5% against the USD after the address," says Sebastian Steyne, an FX hedging specialist at Sable International. 

"This week, we look to see if the ZAR weakness persists or if there is a glimmer of hope on the horizon. South African inflation figures will be released on Wednesday, where we expect month-on-month inflation to cool down, which will be a welcome respite to South African consumers," he adds. 

Sterling has, meanwhile, benefited from Office for National Statistics figures suggesting ongoing growth in employment and stronger-than-expected increases in regular pay for some workers over the final quarter last year.

"Looking under the hood, the strength in core wage growth is increasingly coming from the public sector (c.17% of total employment), which is carrying strong momentum," says Abbas Khan, an economist at Barclays.

"However, within the private sector, while headline %3m/y growth printed at 7.3%, this masks the fact that, on a sequential basis, December %m/m wage growth weakened notably from an annualised 8.2% in November," Khan adds.

Above: GBP/ZAR shown at weekly intervals with selected moving averages and featured 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.)

Tuesday's data keeps alive the risk of another increase in the Bank of England (BoE) Bank Rate in March and was followed by widespread gains for the Pound, although the outlook for GBP/ZAR is hinged on the outcome and implications of UK and South African inflation figures out on Wednesday.

Consensus looks for the UK inflation rate to fall from 10.5% to 10.3% but anticipates a lesser decline from 6.3% to 6.2% in the more important rate of core inflation, which overlooks changes in food and energy prices and is expected to ease from 6.3% to 6.2%. 

"The latest reading of CPI inflation in South Africa was 7.2% y/y (December), with January likely to come in at the same rate, despite it being a high cost pressure month, as a R2.00/litre petrol price provides some counterbalance," says Annabel Bishop, chief economist at Investec. 

"International food prices fell by 0.1% m/m in January, and with food costs the largest component of the CPI basket in SA, this will also aid in likely stabilising the inflation rate for the month," Bishop adds. 

For the UK data the risk is of inflation remaining stubbornly elevated and stoking market expectations of further increases in Bank Rate later this year, which might be positive for Sterling and GBP/ZAR, but the Rand is also likely to be responsive to the latest South African retail sales data also out on Wednesday.