Pound-to-Rand Rate Forecast to Fall to 15.50 as Rand Continues Uptrend

The Pound-to-Rand exchange rate has shown little volatility of late, unlike other Rand pairs, but it may catch up as some weakness is forecast eventually.

The Rand has been on the rise of late although this has not been reflected in the movements of the Sterling pair because the UK currency has strengthened too, resulting in a sideways market.

The Rand's gains can mainly be seen versus the weakening Dollar, which fell below 12.00 bucks to the Rand for the first time in three years yesterday.

The weaker Dollar is also supportive of the Rand more generally because the two have an inverse relationship.

Above: Pound-to-Rand daily chart.

A weak Dollar reduces the foreign debt burden for South African (SA) businesses as a large proportion of their debt either originates in the US or is denominated in US Dollars.

From a commodities standpoint, a weaker Dollar increases the price of commodities because of the international custom of pricing commodities in Dollars.

This is both positive and negative for South Africa, according to Rand Merchant Bank's (RMB) Analyst John Cairns.

"Commodities have reflected the dollar weakness. Much is being made of the oil price surge, Brent cleanly broke US$70/bbl yesterday, which hurts SA’s terms of trade. But some of SA’s main commodity export prices are also surging, coal notably pushed to the five-year high of US$100/tonne, while gold and platinum are near the best levels seen in the past year." 

There is a strong correlation historically between a weak Dollar and strengthening emerging markets.

"The link with commodity prices is well known but it is amazing to look back and see how strongly a weak dollar is linked to surging SA and EM economic growth and to a surging rand and EM currency strength. This dollar move is truly THE big story," says Cairns.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

Downgrade Averted

The Rand has also been helped in recent days by the optimistic outlook of the South African delegates at Davos, who are now saying they do not expect Moody's to downgrade the country's credit rating to junk status in February.

"The SA Davos contingent is also talking the talk. Most importantly, Minister Gigaba yesterday promised a tough budget that will stabilise debt and South Africans will have to “bear some pain”. He even said that he is very confident that a rating downgrade can be avoided (we are not)," adds Cairns.

He's not the only one - the head of the South African Reserve Bank (SARB) Lesetja Kganyago was also optimistic according to reports.

"Lesetja Kganyago seemed very optimistic yesterday: the efforts of the new ANC leadership and their attempts to support the economy will prevent South Africa’s rating downgrade in his view. The South African economy was in a much better state now than at the time of the last rating review, stated Kganyago in an interview," says Commerzbank Analyst Alexandra Bechtel.

Politics are also Improving 

The Rand has been rising ever since the election of Cyril Ramaphosa as the new leader of the ANC in December as he promised a fresh start with more growth-friendly policies.

Concerns that he did not win a large enough majority to have the power to make any changes, or that Zuma would stymie his efforts as he is still President of state, appear to have been misjudged as he has already changed the board of a large government-owned energy company.

"Ramaphosa has gained significant influence over the past weeks. One indication is the change to the management of one of the large state-owned energy suppliers, where two ministers reporting directly to Ramaphosa have now been appointed as managers. The market is betting on a fresh start in South African politics, but in fact, nobody knows how much longer Zuma will cling to his post," says Bechtel.

South Africa's Department of Justice fired the starting pistol on a judicial inquiry into alleged corruption within the South African government, broader state and public sector when it published the terms of reference for the investigation.

Headlined as the Judicial Commission of Inquiry into Allegations of State Capture, Corruption and Fraud in the Public Sector Including Organs of State, the inquiry will attempt to determine whether members of the South African government allowed themselves to be bought by special interests and/or engaged in other corrupt behaviour. 

Allegations of wrongdoing go right to the very top with President Zuma himself implicated. The allegations have become a defining feature of his presidency and, with the inquiry now set to get underway, calls for Zuma's resignation could grow louder over the coming weeks.    

Technical Outlook

As already stated the GBP/ZAR has not shown the same volatility at USD/ZAR because Sterling's appreciation has canceled out the strengthening of the Rand.

The pair has been going broadly sideways over recent weeks as can be seen from the weekly chart below, however, the overall trend is down ever since the pair broke out of a rising channel and fell steeply in late 2017.

From a technical perspective, we still see a marked propensity for further downside and expect a continuation lower once the current, temporary sideways consolidation finishes.

A break below the 16.42 lows would probably result in an extension down to an eventual target at 15.50. 

Above: Pound-to-Rand Weekly Chart.

The target is calculated based on the assumption that the pair is currently forming a bearish flag pattern which tends to extend a bare minimum of 61.8% of the length of the move prior to the consolidation -otherwise known as the pole.

We have labeled the pole 'a' in the chart above, and the expected extension down to the target as 'b'.

The fact the MACD momentum indicator in the lower panel (circled)  has broken below its zero-line is further evidence of a bearish bias to the chart.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.