Credit Downgrade Woes Weigh on SA Rand, Techs Suggest GBP/ZAR Set to Rise Further

The South African Rand is seen struggling against the Pound amidst fresh fears concerning the future of the country's credit rating.

A report out from Moody's this week flagged ongoing structural growth concerns and worries over the independence of the South African Reserve Bank (SARB) as being potential triggers of a downgrade to bonds denominated in the domestic currency.

Recall, SA bonds denominated in foreign currencies have been downgraded to junk, but 80% of all bonds issue by the government are issued in Rand. These are still at investment-grade status.

But, there are clearly risks to the status of these bonds.

The country is now teetering on the edge of being downgraded to sub-investment grade which would be woeful for the Rand.

“Should the agency decide to downgrade SA, the local and foreign currency credit ratings will be in the sub-investment category — this will leave only S&P to downgrade for the country to be removed from the coveted World Government Bond Index,” continued the RMB analyst.

The Pound, meanwhile gained ground due to Chancellor, Philip Hammond, taking a softer line on immigration, however, those gains may prove temporary, as other forces within the cabinet continued to promote a harder line on freedom of movement and Brexit.

Technicals: More GBP/ZAR Strength?

From a technical perspective, our studies suggest the Rand looks set to weaken and the Pound to rise.

In our previous update, last week, we thought the Pound to Rand might be forming a triangle as illustrated in the chart below, however, price action since then suggests otherwise.

Instead, the exchange rate has consolidated its break above the major multi-month trend-line and is forging higher- reinforcing the expectation of the Rand falling.

It has now reached the level of the previous 17.5983 highs – peaking at only two points above, at 17.5985 before pulling back to the current 17.4913 level.

Thus a much more bullish scenario is evolving than we had counted on.

We now see a much higher probability of more upside evolving from here.

The extent of the follow-through higher after the trend-line break is usually calculated by taking the move immediately before the break (a) and extrapolating it higher (b) – which suggests an extension to roughly 18.0000.

For confirmation, however, we would want to see a move above the 17.5985 highs.

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