South African Rand Strength Ahead?

The pound sterling may be trading near its maximum against the South African rand as the country’s central bank looks to raise interest rates in coming months.

The pound has powered higher against the South African Rand in 2015 with GBP-ZAR hitting multi-year records.

We have suggested in previous reports that 20.00 is achievable based on the momentum behind the recent move higher - the trend is the safest route to follow.

As the below shows, the currency pair has been moving higher within the confines of a well-defined channel:

19.00 GBPZAR now appears to be the support zone to the recent June decline, if it holds we would suggest the trend higher remains alive allowing for the next leg of the move towards 20.00.

While technical analysis favours the GBP, there are suggestions that ZAR will not yield anymore ground because the South African Reserve Bank (SARB) is eyeing an interest rate rise in 2015.

When it comes to currencies the general rule is that when a country enters a period of interest rate hikes the currency moves higher as global funds are attracted to improving yields.

A new research note from Bank of America Merrill Lynch Global Research suggests that the SARB is primed to raise rates which will in turn allow the ZAR to strengthen across the board.

Indeed, BofA’s latest forecasts for the pound v rand exchange rate price the pair at 19.02 in September 2015, 19.25 in December and 18.00 in mid-2016.

If correct, we could be entering a new range within which 19.00 is a fulcrum.

SARB to Raise Rates = Stronger Rand

“We acknowledge significant risk of a +25bp hike by the SARB at the 23 July MPC meeting already. Our baseline view is a delay until November,” says BofA’s Matthew Sharratt from Johannesburg. “We would in any case note that, even if the SARB did move earlier than our central view, we would still expect only one +25bp hike this year to 6.00% this year, outside of sustained Rand weakness.”

BofA are waiting for the 29 June ruling by the energy regulator, Nersa, on Eskom’s request for an additional hike in electricity tariffs in order to get a clearer picture on the inflation outlook.

“We did note last week that National Treasury had recently signalled that any additional tariff hike that is awarded to Eskom would only likely to be implemented in FY16 which would, in our view, imply a much more favourable trajectory for CPI than would have been the case if an additional tariff rise went through in July 2015 already,” says Sharratt.

The underlying message here then is that the future of interest rate decision making in South Africa rests with inflation – we will therefore be watching the monthly releases to see whether it is coming above or below expectations.

If it undershoots then we could see the GBP-ZAR make a stab at 20.00 as the SARB will likely hold back on that pro-ZAR rate hike.

However, if inflation outperforms we would suggest that those with outstanding ZAR payments act as the best rate of exchange may have passed.