GBP/ZAR Tipped to go Higher by Morgan Stanley

Buy Pound Sterling against the Rand say strategists at one of the world's largest investment banks.

Strategists at Morgan Stanley say they are looking for the Pound to rise against the South African Rand over the short-term.

Analysts are strategically 'bullish' on Sterling in the near-term as they see the recent unwinding of domestic political risks as likely to prove ultimately positive for the currency.

At the same time, they see market sentiment having shifted versus the Rand recently, due to domestic economic and political developments.

“Recent weeks have seen a series of negative headlines in South Africa with the economy in recession, Moody’s keeping its outlook at negative and the ruling that any no confidence motion could be through a secret ballot,” says Morgan Stanley’s Hans Redeker.

Morgan Stanley view the currency as having been ‘shielded’ by positive market sentiment linked to improvements in the outlook for emerging markets and the 'reflation trade', however, they now see these effects as fading, or being overshadowed by growing domestic headwinds.

“Recent developments including the announcement of the new mining charter and questions about the future mandate and independence of the SARB may make the market reassess the outlook on ZAR,” says Redeker.

It is feared the new mining charter, which gives more rights of ownership to black South Africans, could lead to an exodus of mining investment.

However, there are other drivers at play, as with domestic bond markets in a tail spin and, “uncertainty about G3 central bank monetary policy, we think ZAR will start to suffer,” said Redeker.

Morgan Stanley think trading ZAR versus the Pound offers the best risk/reward, because of the, “reduced probability of a cliff edge,” on Brexit and recent hawkish comments from Bank of England chief economist Haldane and a, “U-turn by Governor Carney.”

The now very real prospect of an interest rate rise at the Bank of England is seen as being broadly supportive of Sterling.

Morgan Stanley recommend buying GBP/ZAR with a target at 18.00 and a stop-loss at 16.00 to be triggered just before the New York stock market closes.

The main risk to the trade is UK Brexit uncertainty, with, “any setback in the EU negotiations causing GBP to come under pressure.”