South African Rand Advances on Pound Amidst Emerging Market Favouritism

The South African Rand continues along its path of appreaciation versus the Pound after the outlook for emerging market currencies brightened.

A resurgence of interest in using EM currencies such as the Rand for carry trading has helped support the recent rally - which translates into a move down for GBP/ZAR since it results in less Rand per Pound.

Carry trading involves borrowing cheaply in a low-interest funding currency such as the Euro, Yen or Pound and investing in higher interest rate currency such as the Rand, Rupee or the New Zealand Dollar.

The investor then pockets the difference that the higher interest rate yields.

From a technical perspective, GBP/ZAR is declining in a sort of wedge formation.

Most recently it has consolidated and moved sideways:

Looking at the actual ranges of recent days we can see that twice the exchange rate has moved down at the start of the day but then recovered and ended on a high. This rejection of lows, the long wicks, and ranges below the real bodies of the candlesticks infers underlying strength.

In addition, we note the convergence between the exchange rate which is falling and the MACD which is rising, which is also a sign of underlying strength as the new low has not been corroborated with a similar low in momentum.   

A break below the recent lows at 16.0000, however, would confirm more downside towards the 15.8000 mark and the lower boundary of the wedge-type pattern.