South African Rand (ZAR) Could be Due a Period of Strength

The sell-off in the ZAR over recent weeks may have now run its course – the move lower looks overdone and a broad-base pullback is becoming increasingly likely.

Making the fundamental case for South African Rand strength is the news that ratings house Fitch decline to downgrade the country’s credit rating – something that would certainly have been felt in financial markets. The relief has boosted buying interest in the domestic currency.

The technical argument meanwhile shows an over-extension of the move lower in the majority of Rand currency pairs over recent weeks which has us believing a bounce is likely. The currency is trading close to longer-term extremes and when markets approach this kind of extreme pricing a move back towards the longer-term trend levels becomes increasingly likely.

Indeed, at the time of writing we are seeing some pro-ZAR moves:

• The pound to South African Rand exchange rate (GBPZAR) is lower at 19.1529, see our 2015 graphs and pound / rand historical rates here.
• The euro to South African Rand exchange rate (EURZAR) is at 14.1317, higher than the previous day's closing rate.
• The US dollar to South African Rand rate (USDZAR) is higher on a daily basis at 12.5277.

The quotes here represent the wholesale market. International payments attract a discretionary spread which ensures the rate offered by your bank can limit your purchasing power. An independent FX provider can however get closer to the market, in some instances delivering up to 5% more FX, learn more.

Be aware that swings in the Rand are also currently being driven by moves in the euro, so keeping an eye on the EURUSD could be wise.

"Both USD/ZAR and EUR/ZAR are reflecting the EUR/USD move, pushing lower and higher respectively yesterday, implying some scope for intraday volatility in both pairs. As yet, however, EUR/USD has no clear trend, being safely stuck in the 1.11 - 1.14 range and we suspect no clear trend will emerge on the rand pairs either," says John Cairns at RMB.

Helping the South African rand from a fundamental perspective is ratings house Fitch who delivered a positive surprise by not downgrading South Africa’s sovereign profile, although they still have us on negative ratings watch.

“Based on their brief statement it seems that better fiscal numbers have stayed their hand and it is now even possible that SA will escape a downgrade when they review it again in December. Given that the review was released after the markets closed, it is possible that the news will give local markets a small boost this morning,” notes Cairns.

Meanwhile, the rand’s continued underperformance, in the absence of a clear driver, is starting to look overextended. We have written previously that the GBP-ZAR looks intent on attacking the 19.00 level, and now this has been achieved the 20.00 marker looms. We are however inclined to suggest consolidation will occur ahead of this target being achieved and patience is required by those looking to transfer sterling into rands.

RMB highlight that for now risks appare to lie in either direction: despite the trend of the past few days, sharp rand gains are just as possible as sharp rand weakness.

Light Volumes Dominate Currency Markets

FX markets remain choppy in light volume; the USD was buffeted by reports (later denied) that President Obama had told the G7 summit that the strong USD was a problem.

The DXY remains lower on the day as markets consolidate last week’s rebound. Global stocks remain on the defensive and DM fixed income retains a soft undertone (excluding the US, so far today). Crude oil is down nearly 0.9% on the day while gold is steady.  

Chinese imports in May crashed, boosting the trade balance to a near-record USD 59.5b (mkt 44b). Imports fell by -17.6%/yr (mkt –10%, -16.2%) where imports from Europe fell -17% over the past year (Q2 compared with a year ago) while imports from Australia fell by over -30% (slightly smaller in USD terms).

These developments from China will help keep sentiment towards commodity currencies – of which the South African Rand is classed – under pressure from a global perspective.