Pound to South African Rand: Outlook for the Coming Week

The Pound to South African Rand exchange rate (GBP/ZAR) appears to be treading a broad sideways trend between about the 17.70 and 15.00 levels.

After looking at this consolidation carefully and modelling different future price action scenarios on to it, I have come to the conclusion that it is possible a triangle pattern may be forming (turquoise blue, see chart) and that the next move could be down, completing the ‘d’ wave of the still unfinished triangle.

This would explain why the exchange rate did not break out convincingly after tentatively breaking above the trendline.

A break below the 16.69 lows would signal a continuation of the current corrective move lower and see it evolving as a component wave ‘d’, of a probable triangle.

Such a move would probably extend down to the trendline at 16.50.

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Data for the South African Rand

The Rand is likely to be more affected by international events than homegrown data this week, although the potential for domestic political risk to impact remains relatively high.

US political risk is a major driver: the greater the risk the better for the Rand.

Currently president Trump is trying to get healthcare reforms voted through by a reluctant house before the US government breaks for its summer recess in August.

If he fails then there will be no fiscal basis for tax cuts and this will probably weigh on the outlook for inflation, interest rates and ultimately the Dollar – however, it will be a positive for the Rand which appreciates inversely to US interest rates and the Dollar.

OPEC is currently meeting to discuss oil production cuts and news so far suggests members are increasing pressure on Nigeria to cut its production after it was made exempt at the previous meeting to help its flagging oil industry recover.

If the meeting leads to more cuts and a rise in the price of oil then that will probably be supportive of the commodity block in general, including the Rand.

Locally, the Rand may be impacted after the release of Unemployment data for Q2 on Tuesday, July 25 at 10.30 BST.

Judging from the recent strong uptrend in unemployment the outlook doesn’t look good for unemployment, which might have a further negative knock on effect on the Rand.

Data for the Pound

GDP is expected to continue trundle along at sub-par levels around the 1.5-2.0% mark which we have grown accustomed to in 2017.

The first set of estimates for growth in the second quarter are released on Wednesday July 26 at 9.30 BST, and are likely to be the most significant release for the Pound in the week ahead.

They are currently expected to show a slightly slower 1.7% rise in GDP in Q2 compared to a 2.0% rise at the same time last year (in Q2 in 2016).

Such a result will pull growth down to the lower boundary of the current GDP growth rate range.

Quarter-on-quarter, growth in Q2 is likely to be 0.3% higher than it was in Q1, when it was only 0.2%.

The other release of note is Mortgage Approvals in June, from the British Banking Association (BBA).

These are also out at 9.30 on Wednesday July 23.

Mortgage Approvals have been oscillating in a subdued range for years since the great recession as illustrated in the graph below.

They have, however, formed an interesting triangle pattern over the last few years which provides clues of what might happen next.

Triangles almost always a precursor of periods of high volatility, and although we can’t tell which way the volatility will extend, it is highly probable there will be either a large swift spike higher or lower in the data.

The triangle has probably almost finished as it has formed 5 component waves -  a,b,c,d,e - which is the minimum number to prove completion.

For confirmation, we would be looking for a move above 47,500 in an upside break; or below 37,000 in a downside break.

Using the height of the triangle at its widest as a guide we forecast a post-break volatile spike of about 8,000 -12,000 approvals higher or lower, so assuming the previously mentioned levels are breached, the upside target is 55k level and the downside 30k.

Given housing is such a key leading indicator for the economy this may be a key early warning for the general health of the economy going forward and thus the Pound.

A spike lower in approvals would probably drag down Sterling and vice versa for a spike higher.

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