Pound to South African Rand Rate Risking Further Downward Drift as Rand Finds Feet

• GBP/ZAR risking further slippage after Rand finds feet 
• Helped by RMB's recovery & reducing geopolitical risk
• Lower load-shedding, inflation also hampers GBP/ZAR

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The Pound to Rand exchange rate ebbed back toward its June lows early in the new week and ahead of the month-end but could be set for further losses up ahead should local and international economic developments remain aligned in supporting a recent recovery of the South African currency.  

South Africa's Rand rose against the Australian Dollar, Japanese Yen, Turkish Lira and Russian Rouble but was otherwise a laggard among G20 currencies over the week to Tuesday owing to losses acting like a handbrake on an earlier that still leaves the Rand as the top-performer of the month.

Gains for the Rand spanned between 32% in relation to the Turkish Lira and just 0.23% when measured against the Brazilian Real but the South African currency was also an outperformer on Tuesday when the economic and political stars appeared to be aligning in favour of a further recovery.  

"Despite the elevated geopolitical risks, the rand and SAGBs had a solid start to the new trading week, with the rand on course to finish the session as one of the best performers in the EM FX basket while yields across the curve fell, although the move lower was largely parallel," says Walter de Wet, a currency and bond strategist at Nedbank. 

"This morning, it currently trades close to the best levels of yesterday. The short-term technical picture remains neutral, but the price action does suggest the possibility of additional gains in the short term: Possible trading range for the rand today: 18,3000 to 18,8000," he adds in Tuesday market commentary. 

Above: Pound to Rand rate shown at daily intervals alongside USD/ZAR and EUR/ZAR. Click image for closer inspection. 

A recovering Renminbi is one factor that could have helped support the Rand on Tuesday after Premier Li Qiang reportedly told the World Economic Forum's 14th Annual Meeting of the New Champions that Chinese economic growth actually accelerated this quarter.

State banks were also reported to be intervening in the currency market to support the Renmimbi, which rose from its weakest level since November in European trading and does often appear to pull trade partner currencies along in its wake when rising or falling. 

The Renminbi was among the biggest fallers among G20 currencies in June when the Rand itself outperformed other currencies but both were close to bottom of the bucket for year on Tuesday following a months-long period of speculation suggesting China's economic recovery might have been faltering. 

"The rand is likely to remain volatile, influenced by global events more heavily currently, as lower load shedding stages and President Ramaphosa’s recent efforts to strike a more neutral balance in global geopolitics have been overshadowed," says Annabel Bishop, chief economist at Investec.

Another helpful development for the Rand was in Russia where the courageous words and actions of Wagner Group founder Yevgeny Prighozin have led to speculation in South African media suggesting President Vladimir Putin might now be likely to avoid attending an August summit in Johannesburg.

Above: Quantitative model estimates of ranges for this week corrected for earlier data entry errors. Source Pound Sterling Live.

Prighozin led a peaceful but armed protest against the military leadership and reportedly alleged that Russia's invasion of Ukraine had been launched only for a certain group of people to "show how strong of an army they are."

The remarks were suggestive of Russian personnel questioning the purpose of the invasion after meeting determined and continuing resistance from Ukrainians but for the Rand the benefits are in financial market perceptions of reduced geopolitical risk if security concerns lead President Putin to avoid the BRICS summit in August.

"Russian president Vladimir Putin's troubles at home may yet offer South Africa a get-out-of-jail-free card that could help support the rand and local markets," News24 reports.

Johannesburg's hosting of the August gathering had been complicated by an International Criminal Court arrest warrant for President Putin resulting from allegations made during the invasion of Ukraine, and South Africa's current status as a signatory to the Rome Statute of the International Criminal Court. 

Geopolitical risks had been widely cited as a weight on the Rand since the U.S. ambassador to Pretoria alleged in May that South Africa had supplied arms for the invasion but these risks now appear to be fading.

Above: Pound to Rand rate shown at weekly intervals alongside USD/ZAR and EUR/ZAR. Click image for closer inspection. 

"We think that we could be approaching the bottom in some of the local developments and this, together with a potentially more risk-supportive global backdrop, should allow for pressures on the FX to ease," says Kamakshya Trivedi, co-head of global foreign exchange, interest rate and emerging market strategy at Goldman Sachs.

"To reflect this stabilisation in local developments as well as our expectation of a more resilient global cycle, we revise our USD/ZAR forecasts lower to 18.25, 17.75, 17.50 in 3-, 6-and 12-months (from 18.75, 18.00. 17.75 previously)," Trivedi and colleagues add in a Friday research briefing. 

The less burdensome offshore environment for the Rand has also been complemented by reduced load-shedding at national electricity monopoly Eskom and falling South African inflation rates, which have restored some semblance of stability to the local currency and bond markets.

An improved domestic backdrop is a part of why Goldman Sachs upgraded the Rand by cutting forecasts for USD/ZAR on Friday in an outcome that also has bearish implications for GBP/ZAR, which is now tipped to reach 22.66 over a three-month horizon.

"This week, there will be no important South African data, so we expect the market to be mostly swayed by global factors such as the US PCE data later the week," says Sebastian Steyne, an FX risk and hedging specialist at Sable International.