Bruised Pound / Rand Exchange Rate Could Slip to Fresh Multi-Year Lows, but Politics Remains a Wild-Card
Pound Sterling enters the new week bruised having suffered the ignominy of falling to its worst levels against South Africa's rand in the week prior.
The GBP/ZAR exchange rate slipped to 16.0685 on Wednesday, February 15 as global investors rushed into high-yielding emerging market money markets to take advantage of their generous interest rate yield.
As noted here, the so-called 'carry trade' is back in fashion, and this is likely to support the Rand.
Concerning the near-term outlook, we note a triangle pattern has formed on GBP/ZAR which offer bearish connotations concerning the outlook:
The pattern is probably finished as it has formed the constituent five waves.
Given that the trend prior to the formation of the pattern was down, it will probably continue down after the triangle has completed.
We would want to see a break well below the lower borderline to confirm more downside.
Such a move would be confirmed by a push below the 16.0000, with the next target down at 15.5000.
Political Risks Loom
From a fundamental perspective, the Rand may see some headwinds this week.
Political risk has come to the fore after the as talk of a cabinet reshuffle raises the possibility of changes in key positions, although the finance ministry is expected to remain the same, according to Rand Merchant Bank’s John Cairns in a client briefing seen by Pound Sterling Live.
“Renewed talk of a cabinet reshuffle could weigh initially. A reshuffle is certainly more likely after Brain Molefe was appointed to parliament and given the need to find Dlamini-Zuma a position. This does not, however, imply that the finance or deputy finance minister positions will be changed. Anyway, surely cabinet will not be changed around the time of the budget?” reflects Cairns.
The South African Budget is out on Wednesday so there is unlikely to be a reshuffle until later in the week.
Brian Molefe is a controversial appointment which has upset coalition partners of the ANC.
The Pound this Weeks: Politics, GDP Data
From a hard data perspective, the Pound's week kicks off with the CBI Industrial Trends Survey which read at 8, well-ahead of expectations for 3. This confirms demand for UK-manufactured goods has hit a two-year high with the strengthening in demand led by the mechanical engineering and metal products sectors.
Ahead, markets will look to the GDP data release on Wednesday at 9.30, however, these are revisions from preliminary estimates already published, and are not expected to diverge.
At the same time as the GDP is released we will also see key Business Investment stats for the fourth quarter, which will tell the level with which Brexit concerns are restraining investment, although this has not particularly been the case up until now.
On Friday, February 24 meanwhile we shall see the release of Mortgage stats from the British Banker Association (BBA).
The UK focus seems more likely to shift back to politics over the coming week as on Monday Parliament reconvenes after its February recess.
The House of Lords will begin debating the government’s bill to enable the activation of the Article 50 process to leave the EU.
The bill emerged unscathed through the House of Commons, and the Lords seem likely to make only modest tweaks.
“But the amendments do not seem likely to endanger the government’s end-March timetable for activation. Depending on the extent of the proposed changes, activation could even coincide with the EU Council meetings scheduled for 8-10 March,” says Sawicki.
Should the Lords succeed in making amendments to the Bill we would expect this to be positive for the UK currency.
We have seen over recent months that markets tend to like the idea of increased parliamentary scrutiny as it suggests a ‘softer-Brexit’ is a likely outcome.
