Pound-to-South African Rand Technical Studies Suggest the Pair is Poised to Resume its Uptrend

The Pound-to-South African Rand looks poised to advance in the coming days, helped by subsiding Brexit fears and what many expect to be a disappointing ANC budget.

GBP/ZAR continues its recovery in an ascending channel and is expected to extend higher towards an upside target at 18.45, which is at the level of the upper borderline.

From a technical perspective, a break above Friday's 18.12 highs would probably signal a continuation higher towards that target.

The pair spent much of September in a short term up-trend, taking the exchange rate from a low of 16.65, to a high of 18.33.

It then pulled back in a three-wave abc corrective pattern (see chart) to 17.60, which looks like a zig-zag with waves 'a' and 'c' both normally of a similar length.

After the abc completed, the pair began pushing higher last week and we forecast a continuation of this move, which should see the pair extend toward the aforesaid target at 18.45.

Data, News and Events for the South African Rand

The main event for the Rand in the coming week is likely to be the announcement of the autumn budget statement on Wednesday, although, commentators are not very optimistic about the result, and the Rand may lose ground as a result.

"On the local front, we expect a terrible budget on Wednesday — simply put, there are no more rabbits to pull out of the hat," said Rand Merchant Bank's (RMB's) John Cairns.

He expects the 2017/18 headline budget deficit figure to be revised up to 4.1% of GDP from the February target of 3.1%, representing the, "largest slippage for a current fiscal year relative to February budget projections going back to 2009," said Cairns.

Yet although this could exacerbate fears that credit rating agencies could downgrade the country's credit rating to junk status in November, Cairns does not expect a downgrade before the presidential elections in December, so regardless of the widening deficit South Africa will probably hold onto its investment-grade credit rating.

The Rand is always highly sensitive to the fluctuations of the US Dollar which it is highly negatively correlated with so a potential driver for both currencies in the coming week would be Trump's decision on who will be the next head of the Federal Reserve.

Currently, we expect a more dovish candidate because of Trump's professed desire to keep the Dollar weak to support exports, and since most of his policies are inherently Dollar-positive, he will probably want an offsetting dovish influence in the Fed. Trump has said he will name Yellen's successor before November 3.

Data, News, and Events for the Pound

Politics will figure highly for the Pound in the coming week.

The currency gained at the end of last week after the EU suggested round two talks on trade might begin in December, after unanimously agreeing not enough progress had been made yet to begin them now.

EU Council President Donald Tusk was particularly positive, saying he though descriptions of talks by the EU negotiator as being at "deadlock" were exaggerated.

The Pound recovered on Tusk's more optimistic comments after having sold off almost all wee.

Over the weekend we suggested there might be a 'Tusk bump' on Monday as markets started to see a light at the end of the Brexit tunnel - and indeed this seems to be the case after GBP/EUR gapped higher to 1.1221 right at the open; currently, it is trading at 1.1223.

The main hard data release for the Pound will come in the form of the first release for third quarter GDP, out at 9.30 BST on Wednesday, October 25.

The consensus estimate is for GDP to grow at 0.3%.

The result is important because it could make the difference between whether the Bank of England (BOE) hikes rates or not in November.

"PMI data suggest the GDP numbers will show another lackluster 0.3% expansion in the three months to September, matching the performance seen in the first half of the year," said Markit IHS, Principle Economist, Bernard Aw. 
 
Yet he suggests the GDP result would have to be a fair bit lower to change the views of the hawks on the Monetary Policy Committee.

Nevertheless, a weaker number could still the hike till December. 

"A stronger number would be seen by many as sealing the deal on a hike," concluded Aw.