Pound to South African Rand Correction Could Take GBP/ZAR Back Near 23.50

"The rand has seen an about turn as global financial market sentiment became less risk averse against EM currencies" - Investec.

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The Pound to South African Rand exchange rate entered the new week in remission following a near miss with record highs in earlier trade but could fall further and potentially as far as the 23.50 area if the Dollar remains docile and domestic economic data keeps to an even keel. 

South Africa's Rand was treading water in relation to many of its most comparable counterparts in early Tuesday trade after rallying sharply from its earlier lows, which were new records in some cases, in the opening session of the week.

Risky assets like stocks and commodities rose during early trade this week while Dollar exchange rates softened, though price action also came as Pretoria and Washington offered clarification in relation to allegations of arms transfers to Russia having taken place.

"We are committed to the articles of the United Nations Charter, including the principle that all members shall settle their international disputes by peaceful means. We support the principle that members should refrain from the threat or use of force against the territorial integrity or political independence of other states," President Cyril Ramaphosa said in a statement on Monday. 

"Our position seeks to contribute to the creation of conditions that make the achievement of a durable resolution of the conflict possible. The reality is that the Russia-Ukraine conflict – and the tensions that underlie it – will not be resolved through military means. It needs to be resolved politically. We do not accept that our non-aligned position favours Russia above other countries. Nor do we accept that it should imperil our relations with other countries," he added.

Above: Pound to South African Rand exchange rate shown at daily intervals with Fibonacci retracements of 2023 rally indicating possible areas of technical support for Sterling, and shown alongside USD/ZAR and EUR/ZAR. Click image for closer inspection. 

The president also said "We are determined, in both word and action, to maintain our position on the peaceful resolution of conflict. Guided by the lessons of our history, we will continue to resist calls, from whatever quarter, to abandon our independent and non-aligned foreign policy."

Monday's statement followed by a week of losses in South African exchange rates, which deepened following public comments from the U.S. ambassador alleging that arms had been transferred to Russia using a cargo ship docking in the country back in December. 

The Rand rebound also came as Finance Minister Enoch Godongwana downplayed any prospect of trade sanctions as a result of the allegations.

"After reaching R19.52/USD on Friday, the rand has seen an about turn as global financial market sentiment became less risk averse against EM currencies," says Annabel Bishop, chief economist at Investec, who's warned the Rand could lag behind many other currencies in any further U.S. Dollar correction. 

"Volatile markets are currently taking cheer on the anticipation that the US has essentially completed its rate hike cycle, with the US dollar expected to weaken in the remainder of this year, boosting EM currencies," she adds. 

Above: Quantitative model estimates of ranges for selected pairs. Source Pound Sterling Live.

Last week's heavy losses led the research team at Goldman Sachs to reverse an earlier upgrade to forecasts for the South African currency though the bank also said in its latest update that "the near-term risk-reward of that stance is more balanced, and some reversal is possible," following the declines.

"Reflecting that, we are shifting our 3m forecast of USD/ZAR to 18.75 (from 18.50 previously). The proximate catalysts for this latest bout of depreciation reflect the crystallisation of both well-flagged and less expected risks," writes Kamakshya Trivedi, co-head of global foreign exchange, interest rate and emerging market research, in a Friday research briefing. 

"On the former, concerns around more load-shedding and the impact on what is already an anaemic growth outlook have increased. And with inflation still high and surprising to the upside even with low growth, the SARB faces a tough trade-off to manage, and so may be more constrained in delivering rate hikes to anchor expectations and support the carry in a sharply depreciating currency," he adds.

The Rand's rebound comes with the market looking ahead to first quarter unemployment figures due out on Tuesday and retail sales numbers scheduled for release on Wednesday, although there is no consensus forecast for either.

These are set to be followed by inflation data covering the month of April and a South African Reserve Bank (SARB) interest rate decision next week.

Above: Pound to South African Rand rate shown at weekly intervals with selected moving averages, and shown alongside USD/ZAR and EUR/ZAR. Click image for closer inspection.