Pound to South African Rand Risk Tilts Higher but Chart Resistances Could Frustrate Rally
- Written by: James Skinner
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"The new electricity Minister, Kgosientsho Ramokgopa, warned last week of up to stage 10 loadshedding this winter" - Investec
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The Pound to South African Rand exchange rate has reached almost three-year highs in recent trade and the risk is of it climbing further in the weeks and months ahead but significant technical resistances near and above 23.50 could limit any additional gains for Sterling.
South Africa's Rand rose alongside the Korean Won and Russian Rouble to notch up gains over all over counterparts in the G20 basket on Thursday but it remained close to the bottom of the bucket for the recent week and was still by far the biggest faller of the year-to-date.
"The local foreign exchange markets remain cautious; the rand strength provides the opportunity for renewed USD buying," says Walter de Wet, a fixed income and currency strategist at Nedbank.
"This scenario is likely to remain intact for the foreseeable future as local economic factors weigh negatively on any prospects of a recovery," he adds.
Rolling cross-country power outages imposed by state energy provider Eskom have been widely cited for the underperformance of the Rand this year, and with the South African winter period just getting underway, the danger is that such loadshedding reaches new or more persistent extremes.
Above: GBP/ZAR shown at daily intervals alongside USD/ZAR, U.S. Dollar Index and USD/GBP. Click image for closer inspection. (To optimise the timing of international payments you could consider setting a free FX rate alert here.)
Eskom said on Thursday that Stage 6 load-shedding, involving the most widespread and longest power outages seen so far, would continue until further notice after being announced and imposed almost immediately after the long Easter weekend.
"The new electricity Minister, Kgosientsho Ramokgopa, warned last week of up to stage 10 loadshedding this winter,” says Annabel Bishop, chief economist at Investec.
Loadshedding Update: 12 April 2023.
— Eskom Hld SOC Ltd (@Eskom_SA) April 12, 2023
Following a breakdown of a generation unit at Medupi Power Station, Stage 6 loadshedding will continue until further notice. Eskom will provide an update as soon as any significant changes occur.
"Thin trading conditions around Easter have exacerbated the negative impact of bad news on the domestic currency, with a number of negative factors afflicting the rand last week," Bishop adds.
The impaired quality of life resulting from frequently interrupted power supplies is matched in economic terms by the disruption of heavy industry and deterrence of investment, which are part of why the South African Reserve Bank (SARB) downgraded forecasts for the economy in April.
Above: Pound to Rand exchange rate shown at monthly intervals with Fibonacci retracements of 2015 and 2020 downtrends indicating possible areas of technical resistance. Click image for closer inspection.
"In a brutally honest statement, the SARB said that “further currency weakness looks likely”," says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.
"We think the rand can rally a little on the softer dollar story in the second half of the year, but the shorter-term risks in USD/ZAR lie to the upside," Turner adds in an April forecast review.
South Africa's economy contracted by -1.3% in the final quarter last year following a strong earlier performance but with load-shedding almost continuous since the early weeks of January, the economic outlook has dimmed.
The SARB forecast GDP growth of just 0.2% for 2023 this month and electricity minister Kgosientsho Ramokgopa's warning of a possible shift to an unprecedented Stage 10 of load-shedding suggests there may be a risk of further contraction up ahead.
All of this amounts to downside risk for South African exchange rates and upside risk for pairs like USD/ZAR and GBP/ZAR, although technical resistances around the 23.56 and 23.81 levels would potentially limit any further rally by Sterling.
