Pound Makes Important Breakthrough Against South African Rand
- GBP/ZAR has recovered strongly and is showing potential for more gains
- A bar of resistance at 17.00 is the next target for the exchange rate in the short-term
- The actions of the reserve bank to lower interest rates have weakened the overvalued ZAR
© Lakov Kalinin, Adobe Stock
A mixture of reserve bank policy change and a technical breakthrough on the price charts has improved the outlook for the Pound against the South African Rand, we believe.
A strong up-day yesterday (Wednesday, April 4) saw one Pound go from being able to buy 16.62 Rand to 16.77 and the previously directionless trend turn higher.
From a technical perspective, the GBP/ZAR exchange rate has made a major breakthrough after piercing and consolidating above a key trendline drawn down from the November 2017 highs (see chart below).
The break above the trendline is a bullish sign and we expect, on balance, for the exchange rate now to continue rising, at least as far as the resistance level which runs along the March 19 highs at circa 17.00.
This level will probably act as an obstacle to further gains as it is not just the location of the March 19 highs but also several other previous highs.
Historic highs often put downwards pressure on uptrending exchange rates.
The reason for this is complex, but it is partly because traders who betted prices would go higher at or just below the previous highs, but were subsequently proven wrong, see their losing positions breakeven when prices re-touch the highs, and are tempted to exit their trades rather than risk being wrong another time. It is also partly from short-term technical traders betting on the exchnage rate pulling back from resistance.
From a fundamental perspective, the Pound has been rising against the Rand ever since the South African Reserve Bank (SARB) cut interest rates from 6.75% to 6.50% at their interest rate meeting last Wednesday, March 28.
Lower interest rates weaken a currency by reducing its attractiveness as a medium for foreign investors to park funds.
Most analysts now see the currency as overvalued, with ING Bank's chief currency strategist Chris Turner, a noteworthy example - Turner now sees the currency as 11.0% overvalued.
This suggests pressure on ZAR to weaken as it drifts back to fair value.
Recent news and data has been mainly negative, with tax revenue falling, Business PMI's falling below the 50 level which distinguishes growth from contraction, and the only rise - in Vehicle Sales of 1.4% - explained as due to tactical buying before the imposition of higher VAT charges.
On the positive side for the Rand, new measures brought in by the more reformist-minded Ramaphosa government is starting to bear fruit, with the country's largest utility company Eskom signing 27 contracts with independent suppliers to provide the national grid with renewable energy.
It is though that cronyism on the Eskom board had prevented progress with the project previously until Ramaphosa made reforms and replaced key members.
The new energy sector projects are expected to bring substantial growth and jobs to South Africa:
"The projects are expected to attract R55.92bn in investment and create more than 61,600 jobs over the next three years, with the first connections to the grid expected in 2020. This adds to further evidence that reforms that have been too slow in the past are now being implemented," says Mpho Tsebe, analyst at Rand Merchant Bank (RMB).
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