Pound-to-Rand Rate Technicals: More Falls to Next Target at 17.47 Possible

Our studies suggest the GBP/ZAR rate's decline could continue until it meets a bundle of tough support levels in the 17.40s.

A short-term downtrend remains intact and is expected to extend, according to our technical analysis of the chart of GBP/ZAR, which shows the pair having already fallen quite far from its September 28 highs.

The pair probably formed a reversal pattern called a head and shoulders (H&S) at the September highs, and according to the target generated from that pattern it still probably has a little way lower to go.

The target for the H&S is calculated by taking the height of the pattern ('a') and extrapolating it lower ('b'), which gives a target at 17.42.

Yet despite this valid target, we prefer a downside target which is marginally higher, at the level of the 50-day moving average (MA) instead, at 17.475.

This is also at the level of a midpoint, or 50.0% retracement of the September rally, another key level where prices often station, consolidate and even completely reverse.

For confirmation of further downside, however, we would expect a break below the 17.6015 lows, first.

The change in trend reflects the change in perception of the Rand which formally had been on a weakening streak during September due to concerns the country could suffer a credit rating downgrade in the new-year as well as the news of the removal of the finance minister, Pravin Gordhan, seen by the markets as a 'steady pair of hands'.

Yet the currency reversed strongly recently after a decision by the South African supreme court to allow the reopening of an investigation into allegations of corruption in relation to shady arms deals allegedly conducted by President Jacob Zuma back in the 1990s.

Such is the market's negative perception of the President that the Rand usually strengthens on news that could provoke his demise.

"The Rand reacted quite well to the news that the Supreme Court of Appeal upheld the High Court’s ruling that the corruption charges against President Zuma could be reinstated. Although the result was widely expected the aggressive move right after the ruling was quite surprising. The Rand is enjoying the current wave of EM sentiment and stalling US dollar momentum," says a note on the matter from currency brokerge Treasury One in Johanessburg.

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