GBP/ZAR forecast: down to 19.35 or below in October?
The pound to rand exchange rate has rallied from three-month lows and could go higher in September, although such strength could be misleading because fundamental factors and forecasts from institutions like Goldman Sachs suggest it could slide back to 19.35 and below in October and beyond.
This week’s rally has lifted GBP/ZAR briefly above 20.00 from 19.50, and appeared to draw a line under what was a 7% fall over the two week period to September 10.
While the pound has traded buoyantly in its own right thanks to supportive UK economic data, GBP/ZAR’s recovery owes itself to a relenting rand that has shifted onto the back foot in deference to a rallying dollar this week.
GBP/ZAR tends to move in tandem with USD/ZAR – if the latter’s recent strength persists then it could lift the sterling rate further. Although both could still see renewed losses over the coming weeks.
This is because there’s a risk of the dollar being disappointed in the final quarter by a slower-than-expected US Federal Reserve (Fed) move to taper its quantitative easing (QE) programme, and the rand is still benefiting from greatly improved South African economic fundamentals.
Source: TradingViewWhat’s driving GBP/ZAR?
Cross rate dynamics
GBP/ZAR is driven first and foremost by the relative performance of GBP/USD and an inverted USD/ZAR (ZAR/USD), because it’s a cross rate.
A cross rate is an exchange rate that does not directly involve the US dollar. There are significant differences between how cross rates are determined compared with other currency pairs.
This is because interbank market-makers, whose auction processes determine all exchange rate levels, tend to only trade currencies against the dollar.
They tend not to trade non-dollar currencies against other non-dollar currencies. This means that almost every GBP/ZAR trade elicits a behind-the-screens-process whereby both GBP/USD and USD/ZAR are traded at interbank level.
Selling GBP/ZAR, for instance, would elicit a process whereby both GBP/USD and USD/ZAR are sold, which has technical implications that lead GBP/ZAR to always closely match the relative performance of GBP/USD and ZAR/USD.
Other factors influence GBP/ZAR, but only through their effect on GBP/USD and the inverted USD/ZAR (ZAR/USD).
Economic health
While USD/ZAR and GBP/ZAR rallied this week, the rand has risen against the dollar and sterling during 2021, supported by improved South African economic fundamentals and Fed policy.
Surging commodity prices have lifted the value of South Africa’s exports, bolstered its trade in goods balance and converted the country’s once troublesome current account deficit into a supportive surplus.
Exports have added to GDP, filled national treasury’s tax coffers and made the rand the top performer on the currency market for 2021. This has weighed heavily on USD/ZAR, even leading GBP/ZAR to fall despite sterling also being one of the top performing currencies.
GBP/ZAR and USD/ZAR losses were not without a push from the Fed, because its policy had weighed heavily on both before the Fed’s dot-plot chart revealed in June that more members now favour a rate hike as soon as 2023.
Since June, the Fed’s influence has remained prominent,with markets focused on when the US central bank will end its $120bn a month QE programme.
Source: TradingViewGBP/USD: technical analysis
The mid-September rally has taken the pound to rand exchange rate above its 55, 100 and 200-day moving-averages, and led GBP/ZAR to begin testing the 50% Fibonacci retracement of the fall from 20.95 to 19.44 that took place between the middle of August and September 09.
Major moving-averages have offered both support and resistance to GBP/ZAR in the recent past, as can be seen on the below chart, but have done little to impede the rally in the exchange rate in this instance.
It remains to be seen if the formidable 50% Fibonacci retracement at 20.2004 will succeed in barring its path higher.
Source: TradingViewWhere next for GBP/ZAR?
South African fundamentals continue to offer support to the economy and currency, but what matters most for GBP/ZAR outlook are developments in USD/ZAR, which have been heavily influenced by an indecisive dollar and the twists or turns of the Fed policy since early June.
A recent report from the Wall Street Journal suggested that once the tapering process begins, the Fed could fully unwind its QE programme quicker and sooner than had previously been suggested.
The paper, citing anonymous sources at the Fed, claims policymakers will discuss ending the programme in its entirety by the middle of 2022.
This has supported USD/ZAR and GBP/ZAR, but it’s possible the Fed can disappoint the dollar with a slower pace when plans are announced at September, October or November meetings.
Source: Investec BankNew variants of COVID-19 and the Fed’s stated desire to avoid encouraging markets to anticipate a more immediate interest rate hike could make change slower than many expect.
A slow moving taper could reverse USD/ZAR’s recent upward trajectory, acting as a catalyst for fresh and further declines in GBP/ZAR, the exact depth of which would be determined by the degree of losses seen in USD/ZAR and the accompanying moves in GBP/USD.
GBP/ZAR would retreat back to Monday’s 19.56 level or below if either the dollar or rand pushes USD/ZAR back to last week’s lows of 14.06. However, if GBP/USD rises above this week’s highs of 1.3913 then it would limit GBP/ZAR’s decline.
GBP/USD has not spent more than 48 hours above 1.3913 since the Fed first shocked the dollar back into life in June, so reclaiming that level may take time – possibly longer than it would take the faster moving rand to put USD/ZAR under real pressure.
That would imply a falling pound to rand rate, given the relationships between the three exchange rates, although estimating how far it would fall is a tricky task.
But for example’s sake, if USD/ZAR was to fall near to its June low, to 13.83, say, and at the same time GBP/USD was unable to rise above 1.3913, then the pound to rand exchange rate could fall to 19.35 during the period.
What are analysts saying?
Pound to rand forecasts tend to attract little commentary from the analyst community but Goldman Sachs’ projections suggest the pair could fall steeply over the next six months.
The Wall Street titan has an upbeat outlook for emerging market currencies in general, which it sees benefiting from an anticipated global economic recovery and an expected weakening of the U.S. Dollar during the months ahead.
Goldman Sachs sees the rand rising further against the dollar and pound but has warned clients that it could feature as relative laggard when compared with other emerging market currencies, and especially other high yielders like the Russian rouble.
Analysts at the firm expect capital flows to favour currencies with central banks that are lifting interest rates, and the South African Reserve Bank (SARB) is seen as unlikely to lift its 3.5% cash rate for some time to come.
The bank’s forecasts suggest the pound to rand rate could fall to 19.58 over the next three months and to 18.98 in six months time, while USD/ZAR is seen falling to 13.75 and then to 13.00 over the same period.
The three month USD/ZAR forecast reflects a September upgrade from an earlier 13.25.
Source: GoldmanSachsIt could eventually pay traders to keep in mind that analysts at South African companies are much less optimistic on the rand.
South Africa’s Investec has given a pound-to-rand prediction of 20.00 as an average for the final quarter of 2021, which owes itself to expected weakness in the local currency. This period is also tipped to see USD/ZAR averaging 14.45.
The final quarter coincides with autumn flu season for the Northern Hemisphere and with COVID-19 still rampant there’s a danger that some governments attempt to reimpose restrictions on business activities.
This would be a blow for the global economy, financial markets and for riskier currencies like the rand.
Source: InvestecThe final quarter also features the South African government’s next budget statement, which will be poured over by credit rating agencies, investors and currency traders for insight on if and how the embattled national finances are being repaired. Can the country achieve a budget surplus over the coming years?
South African budgets are often preceded and followed by weakness in the rand because a decade of persistent deficits has lifted the debt-to-GDP ratio too high for credit rating agencies, most of which have cut all of the country’s ratings from ‘investment grade’ to ‘junk’ in recent years.
However, the record trade and current account surpluses referenced earlier in this article make a strong argument that this time could be different.
Note that analyst predictions are often wrong. You should always conduct your own research before making any investment or trading decision.
Reasons to short GBP/ZAR
USD/ZAR has struggled to keep its head above water in 2021 and South African fundamentals have improved significantly.
GBP/USD struggles to sustain recoveries and moves slower than ZAR/USD, so tends to be overtaken when USD weakens.
USD could fall broadly if the Fed is patient before announcing QE tapering and is slow to implement it.
Always remember that your decision to trade should depend on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money.
Reasons to be long GBP/ZAR
Local companies are doubtful ZAR can repeat its earlier strong performance and South Africa’s Q4 budget could emphasise weakness.
New derivations of COVID-19 could have a greater adverse impact on ZAR than on GBP if they disrupt the global economy.
The Fed could taper as soon and fast as a hawkish minority of rate setters suggest, lifting USD/ZAR and GBP/ZAR together.
Always remember that your decision to trade should depend on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money.
Edited by Jekaterina Drozdovica
FAQ
Will GBP/ZAR go up or drop?
Goldman Sachs suggests that GBP/ZAR will fall steeply over the coming months. Meanwhile, projections from Investec suggest it will remain elevated at mid-September levels over the coming months, and shouldn’t rise much further.
Investors and traders should note that analyst forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing. And never invest money you cannot afford to lose.
What is the best time to trade GBP/ZAR?
Optimum timing would depend on whether a trader will go short or long GBP/ZAR. The currency market is open 24 hours a day, five days a week. The GBP/ZAR can be traded between Sunday at 22:00 BST to the same time on Friday.
However, the largest share of foreign exchange trading is carried out in London during European hours, which means foreign exchange market liquidity and trading volumes are generally at their highest during then.
When to buy or sell GBP/ZAR?
Generally speaking, short trades are most profitable when entered at the highest possible price level and vice versa with long trades, although traders should make their own decisions on when to buy or sell any asset or product, following their own process of research and evaluation.
Read More: GBP/USD price prediction: Is GBP struggling to regain ground?
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