Pound / Rand Rate: Downtrend Might be Fading

For GBP/ZAR, the very short-term trend has turned bearish.

This is highlighted in the chart below, which shows a descending sequence of peaks and troughs on the four-hour chart.

A break below the 16.3475 lows would solidify the downtrend and reach a goal at 16.2565 where historical support is likely to act as an obstacle to more downside.

So will further losses be forthcoming?

Unfortunately for those anticipating a stronger South African Rand, the momentum indicator MACD has been going sideways and not confirming the new downtrend.

This shows a lack of conviction and warns sellers to act with caution.

There is a potential for volatility on Thursday and Friday during the UK general election, with the greater risk still currently being that the Pound will appreciate following news of a conservative victory.  

Analysts at ING Bank speculate that anything greater than a majority of 30 seats will drive up the Pound, which for the Pound to Rand exchange rate would mean more upside into the 17s.

Our call for a break below 16.3475 solidifying the short-term bear trend is not a conviction call, therefore, as there is a material risk the Pound could suddenly buck higher at the end of the week due to the elections.

“Rand gains continued yesterday (Monday, June 5), with decent appreciation against both the dollar and euro. Momentum remains positive into today but the rally has probably run itself out: the rand’s outperformance yesterday seems hard to justify and the favourable global backdrop has eased as both EUR/USD and Wall Street stabilise and the environment turns marginally risk-off because of the Qatar issue,” says John Cairns of Rand Merchant Bank.

This supports a view that recent Rand gains are built on questionable fundamental foundations.

He further notes that the rally was not accompanied by increased demand for South African bonds unlike most rallies, suggesting weak potential.

HSBC noted that the Rand is still slightly undervalued compared to other emerging market currencies when valued using the ration of export prices to import prices, also known as the ‘terms of trade’.

However they conclude that the undervaluation -  which was once considerable - has now narrowed substantially leaving little upside potential.

On the data front GDP in Q1 was released on Tuesday, June 6, and fell to -0.7% from -0.3% in Q4 signalling that the country had officially entered into a recession.