South African Rand at Risk of Decline versus Pound this Week

GBP/ZAR declines as the Rand strengthens - next target 15.5300.

The Pound-to-South African Rand exchange rate is continuing its short-term downtrend and has now almost reached the 16.0000 level, we expect it to continue falling to the next target at 15.5000, at the March 2017 lows.

The pair has just bounced off the 16.0000 level of the June lows  (circled below) and although there is a chance it may consolidate at this level for a while it will probably eventually break down and continue towards the next target at 15.5000.

The pair is in the process of completing a bearish flag pattern (see above) which began forming at the November highs.

Bearish flag patterns are composed of a 'pole' section during which the exchange rate sells off steeply and then a sideways, box-shaped, consolidation phase, or 'square', during which the exchange rate moves sideways.

The bearish phase of the flag begins after the pair breaks out below the lows of the square. It is expected to move down at least as far as the length of the pole extrapolated lower multiplied by the golden ration (0.618). In this case that gives a downside target of 15.5300, which is also roughly the same level as the March lows at 15.5000, where we would expect the exchange rate to pause naturally anyway.

The golden ratio is an ancient mathematical constant which has been found to govern proportions in the natural world and financial markets.

Data and Events to Watch for the South African Rand

The Trade Balance is probably the major release for the Rand in the week ahead.

It is forecast to show a deficit of -5.0bn for January, from a previous surplus of 15.7bn, when it is released at 12.00 GMT on Wednesday, February 28.

Normally a deficit is associated with a weaker currency but it is not always the case. A surprise to the downside, however, would probably see the Rand lose ground as it would indicate greater net demand for imports than exports and so net Rand selling.

Manufacturing activity gauges are released from around the world this week and South Africa is no exception.

The ABSA Manufacturing PMI is forecast to fall to 49.9 in February when it is released at 9.00 on Thursday, March 1, from a score of 50.1 previously.

A decline below 50 would be significant as it is the dividing line between growth and contraction.

PMI is short for purchasing manager index and consists in survey results of interviews with Purchasing Managers in companies, who are key personnel for assessing activity in the sector as a whole. PMI results are leading indicators for more general economic growth so they can be important market movers.

On the political front the dust appears to have settled after the ousting of President Zuma and his replacement with Ramaphosa, and although there is still the selection of his deputies, its unlikely to be a source of volatility, as "most of the power is vested in the President," according to Rand Merchant Bank's (RMB) Isaah Mhlanga.

Ramaphosa was more popular with financial markets than his predecessor so his selection has been positive for the Rand, however, it is now possible that the election 'dividend' is all in the price.

"Locally, it seems as though the political dividend is all in the price. Market speculation of a cabinet reshuffle does not mean that it will have a significant impact when it happens," says Mhlanga.

Data and Events to Watch for the Pound

From a fundamental perspective, the most important factor for the Pound in the coming week is the outcome of the extended cabinet meeting held at the Prime Minister's residence at Chequers to heal divisions and decide on a consensus approach to Brexit.

The outcome of the meeting will be crystalised in a speech due to be delivered by Prime Minister Theresa May on Friday, the location and exact time of the speech are yet to be made clear.

The British Pound was seen as one of the better performing global currencies towards the end of the previous week with markets cheering the UK government making progress on their Brexit strategy.

The promise of Conservative party unity on the issue of Brexit is a rare commodity, but this could well be on offer following Theresa May's decision to lock her top team in a room in the English country side and let them out only once agreement had been sought.

Members of Cabinet emerged from the meeting with those on either side of the Brexit divide saying talks were constructive and a unified position had been found.

"GBP is top of the pack by a small margin, as reports suggest the cabinet is closer to agreeing on a unified line on the UK’s post-Brexit relationship with the EU after the Chequers meeting ended late last night," says Adam Cole, Chief Currency Strategist with RBC Capital Markets.

Brexit remains the key story for Sterling and therefore the details of May's speech, and any European response, could, therefore, be key.

The issue of UK interest rates will be in focus with the Bank of England's (BOE) Sir John Cunliffe delivering a speech on Monday at 18.00 GMT, in which he may drop hints as to the BoE's stance on monetary policy.

There is now a heightened expectation that the BoE will raise interest rates by 0.25% in May after statements made in the February meeting statement and more recently in front of the Treasury Select Committee indicated BoE members had adopted a more 'hawkish' stance - 'hawkish' meaning members are in favour of raising interest rates at a quickened pace.

If Cunliffe's speech further reinforces a more aggressively hawkish tightening strategy from the bank and a greater chance of a May hike, the Pound will rise, since higher interest rates are supportive of Sterling, because they attract greater inflows of foreign capital drawn by the promise of higher returns.

It is not expected to, however - Cunliffe dissented from raising rates in November and may well still be on the dovish spectrum.

Clearly, if he has become more hawkish it will be a strong indication of voting intentions and push the Pound higher.

"BoE’s Jon Cunliffe is set to speak on Monday following fellow Deputy Governor Dave Ramsden’s scheduled remarks tomorrow.

Given that both dissented against the November rate hike, it will be interesting to see whether they maintain their reservations in the face of the hawkish testimony delivered to the Treasury Select Committee by the Governor Mark Carney and other MPC members," said Investec analysts George Brown and Victoria Clarke.

House price data from Nationwide is out on Thursday at 7.00 GMT and is expected to rise 2.6% in February compared to a year ago and 0.2% from the previous month. Housing leads the economy they say so it is important, but there are not expected to be any surprises in the Nationwide data, so little probable impact on Sterling.

The major economic release of the week is Thursday's release of Manufacturing PMI for February at 9.30 GMT, which is forecast to show a slowdown to 55.0 from 55.3.

PMIs are surveys of key personnel (Purchasing Managers) in a sector and provide a good leading indicator of growth and activity. A result of over 50 indicates expansion and below 50 - contraction.

Construction PMI is out on Friday at the same time and is forecast to come out at 50.7 in February from 50.2 previously.

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