South African Rand to Push GBP/ZAR to 20.00

South African Rand to Push GBP/ZAR to 20.00

30 March 2016, 22:17
Vasilii Apostolidi

The pound to rand exchange rate has fallen to its 200-day moving average at 21.42 where it could pause ahead of further declines.

The South African Rand is moving towards the bottom of its 5-week range against the pound; if it breaks clearly below the range lows and 21.000, it will probably fall to the next target at 20.0000 rand to the pound.

The achievement of this target is our base case scenario.

The 200-day moving average at 21.42 is currently in the way of further downside, and is actively blocking the exchange rate from going lower.

Traders often concentrate buy orders around the 200-day expecting the exchange rate to bounce or reverse off the level. This could just be a temporary impediment, but it may also provide resistance to more downside longer-term as well.

To be sure, for the 200-day to be cleared, the exchange rate would have to break clearly and decisively below it, such as would be the case if it moved below the 21.0000 handle.

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The pair is trading at the lower end of the range, however, if it were to recover and break above the range highs at 22.8800 instead, that would be a bullish sign and would probably lead to a move back up to 23.7500.

Sterling Weighed Further by Brexit Uncertainty

As far as the pound side of the pair is concerned it continues to trade below fair-value thanks to uncertainty surrounding the EU referendum.

This will probably last until the day after the referendum when the results are in and we know whether the UK will stay or leave the EU.

Unfortunately, due to the polls having proven so inadequate at forecasting the other major referendum in recent history - that of Scottish Independence – even changing poll results may not affect sterling as much as they might if polls were a more accurate tool for forecasting events.

Nevertheless, it is also, likewise possible GBP will go on a roller-coaster ride as the date of the referendum gets nearer.

What is clear is that most banks only see a less-than 30% chance of Britain coming out of Europe, but if it does the pound will plummet between 10 and 20% in a matter of days.

If the probabilities begin falling even lower, however, there is a chance sterling will start to give up some of its Brexit premium (currently estimated at about 8% in GBPUSD) and this will cause a rise in most GBP pairs.

Odds of UK Leaving

Societe Generale place the odds of a Brexit at 22.8% based on a model using options, since these price the probability of the market hitting certain levels:

“If we assume that cable would trade under 1.35 in the event of Brexit, the probability we get from the option market currently is 22.8%.”

One characteristic of this referendum is the high number of undecided voters, who hold the power to swing the vote one way or another.

Chief UK Economist at Italian Bank UniCredit, Daniel Vernazza argues the undecided’s are possibly more likely to vote to remain in the EU:

“Suggesting perhaps that when pressed to give an answer (which is more likely via the telephone than online) respondents tend to go with the status quo of remaining in the EU.”

This strengthens UniCredit’s base-case for the UK remaining, which could be potentially supportive:

“What is clear is that the undecided voters are going to be key. We continue to expect the UK to vote to remain in the EU, but it could be close (in our view the probability of exit is around one-third).” Ends the UniCredit note.

The low probability of the UK leaving the EU according to the bank analysts at SocGen and UniCredit suggests a heightened chance of sterling strengthening rapidly following the referendum on June 23 if the result is a win for ‘remain’.

This would mean a massive rebound for GBP/ZAR, which could be in the order of 7-9% according to analysis of other GBP pairs conducted in an attempt to isolate the ‘Brexit premium’, which has been measured as potentially 8% in GBP/USD, using an interest rate-based model to determine ‘fair value’ developed by analysts, also at UniCredit.

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