ZAR Outlook Turning Positive say RMB

The South African rand (ZAR) continues to do well on global foreign exchange markets, can the strength last?

ZAR has pushed the US dollar to 11.89 while EUR/ZAR has pushed through the 12.85 support that has held repeatedly in the past three-months opening the way to better levels for those looking to sell their rand.

The British pound meanwhile trades at 17.6814.

“Rand gains have been helped by an ongoing risk-on tone in global markets following the payrolls figure. Asian equities typify the trend, with many bourses pushing to new post crisis highs this morning. Large portfolio capital inflows also help: since the Fed meeting, foreigners have bought almost R30bn of local assets,” says John Cairns at RMB in Johannesburg.

RMB have told clients that they are taking on a more bullish outlook when it comes to the ZAR.

“Over the past few months our bias has been to fade any rand rallies, i.e. take the view that the moves would peter out soon enough. Our sense now is a little different. It seems that large inflows and a rand positive bias might remain as long as expectations remain that the Fed will hike only late in the year,” Cairns says in a note to clients.

Pound Sterling v Rand Exchange Rate has Further to Fall

As we have discussed before, GBP-ZAR has tended to follow a predictable pattern since the start of 2014.

As we can see, the simple logic of the past predicting the future would suggest more declines are likely.

That said, the majority of the move lower by GBP in the current cycle will have already occurred:

Be conscious that all FX quotes in this piece reference the wholesale markets rates - your bank will affix a discretionary spread to this wholesale rate to derive their profit. However, an independent FX provider will undercut your bank's offer, this can deliver up to 5% more currency in some instances, learn more here.

GBP Puts in a Strong Performance

Sterling was the shining light in global FX in mid-week owing to some interesting corporate news.

It was announced that Shell and BG Group would come together to form the UK’s largest company, a deal that could have a large impact on currency flows.

The deal also provides the tantalising prospect of further acquisitions taking place.

The FTSE 100 is dominated by commodity-heavy stocks confirming just how important such deal-making can be to the UK’s currency portfolio.

US FOMC Ahead

The big event to be wary of, particularly for the Rand exchange rate complex is the FOMC event.

In the aftermath of the softer-than-expected March payrolls report, today’s publication of the March FOMC meeting minutes provides the next US focus.

At the March meeting, the Committee showed that it was gradually moving closer to delivering a hike in US interest rates by removing reference to being ‘patient’ about normalising monetary policy.

However, Fed Chair Yellen sounded cautious on the outlook noting that the FOMC wanted to see further improvement in the labour market and needed to be “reasonably confident” that inflation was returning to target before raising interest rates.

“Any discussion in the minutes around the likely level of inflation needed to prompt the FOMC to raise interest rates will be closely watched,” say Lloyds Bank Research.

Furthermore, the focus will also be on any areas of disagreement about the Fed’s near-term reaction function, notably on the influence of the dollar on the economic outlook.