Pound to South African Rand: Forecasting Move Lower to Extend this Week, Political Risks Heightened for both Currencies
From a technical perspective, the GBP/ZAR pair remains in a downtrend which will probably extend.
A break below the flash crash lows at 16.790 would confirm probable sell-off down to the next target at 16.500.
There are also contrary signs, however, that this downtrend could be close to bottoming if the move is interpreted as an Elliot Wave.
Elliot Waves are made up of five constituent waves and the move down from the June highs fits the pattern with waves one and two occurring in June, three in August, four in September and five currently still descending.
After five completes the pair begins a large correction which is likely to rise back up to at least the mid 18s.
A break above 17.250, meanwhile, would probably lead to a move up to 17.500 initially.
Keeping an Eye on Politics
Interestingly, both the Rand and Pound are more prone to bouts of volatility stemming from politics than has traditionally been the case.
For Sterling, we continue to watch the Brexit debate evolve and note how Prime Minister May in particular is a market-mover.
And for the Rand, risks to the upside and downside can be seen in the political landscape argues Rand Merchant Bank’s (RMB) Isaah Mhlanga.
He identifies the main risk to the downside as stemming from politics, especially, the possible arrest of Finance Minister Pravin Gordhan on charges of corruption.
Pravin is acknowledged as a capable pair of hands so such an event would be seen as detrimental to the economy, and might even trigger a credit rating downgrade to junk status.
This would be very negative for the rand.
A groundswell of support for Gordhan from some powerful allies, however, has held up the Rand in recent weeks.
Most recently, the ANC party whip, Jackson Mthembu, pledged his support to Gordhan’s cause.
“What is clear is that an increasing number of ANC leaders are singing the same tune by voicing their support for Finance Minister Pravin Gordhan after he was issued a summons by the NPA,” said RMB’s Isaah Mhlanga.
The likelihood he will be toppled from his position is diminishing, but still not gone.
Budget Speech On Thursday, October 27
Finance Minister Gordhan will be taking centre stage on Thursday when he delivers the medium-term budget speech.
South Africa’s credit rating is currently under review.
It sits just above junk status the level at which institutional investors are much less likely to buy bonds.
Therefore, major rating’s agencies will be paying close attention to the budget speech in order to update their assessments of the country’s credit worthiness.
If they do not like what they hear a credit rating downgrade is possible before Christmas.
Online news website Business Live’s Etienne Retief argues that the Budget is likely to show that tax revenue has continued to increase steadily, which will be a positive for the budget.
“The last several years, projected revenue growth has been low but always positive, even if only in fractions,” he said.
Risks to the economic outlook, however, are still manifold:
“Recent events threaten to send the economy into a negative trend.
“These include the aforementioned corruption charges, the allegations of political motives behind the charges, the potential economic impact of an extended #FeesMustFall campaign, what’s being described as the worst drought in our history, a consistently high rate of unemployment, and an almost certain looming downgrade to junk status by global credit authorities.
“So to what extent should we expect projections to be adjusted downwards and what new economic outlook should we be prepared for?” Said Retief.
A credit rating downgrade is the main risk to the SA Rand as it would lower foreign inflows and increase outflows as funds dropped SA debt like a hot potato given the change to non-investment grade status.
The week Rand itself would also have a negative impact on many parts of the economy as shopping for foreign imported goods would become more expensive and paying back SA foreign denominated debts would also increase.
