Given negative economic fundamentals, political woes and the looming threat of a credit rating downgrade the outlook argues for a weakening of the rand against the pound sterling.
The charts, however, are not nearly so clear-cut.
Although the GBP to ZAR pair has been rising gradually since bottoming on February 23, the rise has been too gradual to convince us it will develop into a bullish reversal, and the short-term trend is still probably on balance bearish given the sharpness of the sell-off at the start of the year.
The pound also shares the ZAR’s vulnerability to political uncertainty over Brexit so neither has a clear advantage from a fundamental perspective.
The strength of the previous move down from the December 2015 highs would probably be expected to lead to a resumption of the down-trend eventually.
However, a clear break below the 200-day Moving Average and the S1 monthly pivot (a level traders often cluster their orders in expectation of a pause, bounce or consolidation of the rate) would be required to confirm further down-side, with break below 20.9545 confirming a continuation down to 20.0000.
For more upside look for a move above 22.8747 highs, leading to a move up to 23.5000 – although that is by no means a conviction trade as there is hefty resistance from a sturdy trend-line in the way at about 22.9000, the former neckline of a topping pattern, which could prevent upside from gaining traction, therefore a break clearly above 23.0000 might be a less risky entry point as it is clearly above the neckline trend-line.
The South African rand slipped 7.0% in the previous week, after coming under pressure from the threat of political instability, when president Jacob Zuma’s administration was once again mired in controversy after two scandals involving the Finance ministry hit confidence in the country’s political leadership.
The first scandal surrounded links between Zuma’s administration and a wealthy family called the Gupta’s, after the Deputy Finance Minister said the Gupta’s had offered to make him Finance Minister, inferring Zuma’s government was in their pocket.
The Finance Minister Pravin Gordhan was also involved in a separate dispute with a special unit of the police called the hawks, over a unit he set up at the revenue service. The Hawks were threatening legal action unless Gordhan answered three-pages of questions. Again the inference being that Gordhan might be involved in illegal dealings.
The rand began to weaken again following the news of the scandals, although it recovered after the governing ANC party’s conference at the weekend reaffirmed its support of President Jacob Zuma and his government. Nevertheless, according to some, the ANC's view is only entrenching the issue, and that Zuma's exit would be passive pro for ZAR.
Nevertheless there is a risk of an increase in political fall-out which could harm the rand over the short to medium term.
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SARB raise interest rates by 0.25% - SA bonds skating on thin ice as rating down-grade threatens
The other major event of the previous week was the South African Reserve Bank’s (SARB) rate hike, which took the bank’s rates up to 7.0% from 6.75% previously.
The SARB’s governor, Lesetja Kganyago, said the rate hike had been to mitigate against a weakening currency and economic outlook. Indeed the rand appreciated to 21.8370 versus the pound on the day.
Mr. Kganyago said the central bank “remains concerned about the weak growth outlook and negative business and consumer confidence.”
He highlighted the negative outlook for the Chinese economy as a major source of concern.
It was the third meeting in a row in which the SARB increased rates.
A major concern for the country is that its bonds could be down-graded to junk status soon after several rating’s agencies recently changed their outlook to negative. This concern was heightened by the political scandals above.
As we reported last week, the macro-mix remains ZAR-adverse: economic growth is almost at a standstill, GDP grew only 0.6% in Q4 and other indicators suggest that the economy is on the verge of a recession.
The Current Account is sporting a 5.1% deficit which is a further weigh on the rand.
The main data release this week is inflation data (CPI) on Wednesday which is expected to rise to 6.7% from 6.2% yoy in February and by 1.1% mom from 0.8% previously.
Core CPI is expected to remain at 5.6% yoy in Feb and rise by 1.2% mom from 0.7% in January.
A surprise increase in inflation is likely to weaken the rand as it will decrease its purchasing power relative to the pound.
This is because more rand will be required to purchase a basket of goods compared to the number of pounds needed to buy the ‘same’ basket of goods, assuming that inflation does not rise at the same pace in the UK.
The normal rule that higher inflation lifts a currency’s worth because it leads the central bank to raise interest rates, which then attracts international investors seeking a higher interest return on their capital, is not so relevant in countries which are politically and economically unstable such as South Africa, as the increased risk tends to limit how much international capital is likely to be enticed.
