Market Forecast - Sterling Vs. South African Rand 26/03/10
The South African Reserve Bank cut interest rates yesterday in a move designed to slow down the rapid appreciation of the Rand. Moving rates down to 6.5% the bank expressed concerns that the currency's strength may hinder exports and derail the fragile economic recovery. At 6.5% the Rand remains one of the highest yielding currencies, and has benefitted from strong investor risk appetite and low yields elsewhere (just 0.5% in the UK for example).
In other news, a dip in inflation helped to confirm the Bank of England's view that price inflation will continue to moderate, but it doesn't do anything for interest rate expectations, which still price in very little tightening in 2010. The Consumer Price Index fell to 3% in February from 3.5%, a big drop but still well above the BoE's 2% target. The budget (or should we say the pre election budget, for there is certainly more to come once the election is out of the way!) delivered no market moving surprises, but did remove at least some of the short term uncertainly hanging over the pound. Nevertheless, sterling fell to a two week low against the US dollar and other currencies, while the real focus was on the euro, which posted sharp losses across the board.
A credit downgrade for Portugal helped the US dollar this week, but the flight into US dollars was limited mainly to selling of the euro and yen, and did not spread to selling of high yielding currencies as is often the case when a major structural event hits the markets. Stock markets have hardly blinked, with the Dow Jones easing back slightly from 18 month highs yesterday. It was Portugal in the firing line this time, but Spain is also a talking point in the markets, and long suffering Greece still has no clear rescue plan.
As long as the negative sentiment surrounding these sovereign debt stories doesn't spread to equity markets the high yielders (of which the Rand is considered pack leader) can continue to strengthen. The fact that Spanish national debt is yielding 3.82% versus 3.97% for sterling 10 year gilts means that even after this week's heightened fears over the state of the euro zone economies, investors still demand a higher return on UK debt because they view it as a higher risk. Hardly a ringing endorsement of the UK's position despite the fact that Gordon Brown recently rebuffed suggestions that the UK's AAA rating is also in danger of a downgrade.
The technical outlook for sterling is dire. Even after the recent falls, we have spent two weeks consolidating at the lows, which usually signals more downside to come. The next noteworthy support is around 10.50, an area that did some work back in 2006. Buyers of the Rand who have little appetite for risk should consider hedging exposure now.
Market Forecast - Sterling Vs. South African Rand 02/03/10
Sterling had already lost one percent against the Rand last week, and promptly lost a further three percent when things got nasty yesterday, the largest one day fall since March 2009 . Not a good start to the week! A weekend poll showing a high probability of a hung parliament set the scene for a wobbly week, but it was no one factor that triggered the big slide. Another contributor was Prudential's announcement that it will purchase AIG's Asian life insurance business.
That will require the sale of a large amount of sterling to fund the $35bn price tag, most of which is to be paid in cash. Markets were also spooked by news items concerning Iran's failure to cooperate with nuclear watchdogs the IAEA. Sentiment toward the pound has been deteriorating sharply in recent weeks, and any one of these news items were excuse enough to cause a stampede for the exit. An apparent improvement in manufacturing activity was completely ignored, and mixed mortgage data did nothing to contribute.
The prospect of low UK interest rates remaining static for a long period further differentiated the high yielding currencies, helping the Rand make hay from sterling's weakness. Firm commodity prices also made the Rand look a relatively low risk bet for once. Stock markets are also doing well, so investor risk appetite is buoyant, except when it comes to sterling.
The technical outlook is dire. We are trading at four year lows this morning, and momentum is extremely negative. The next noteworthy technical support is around 11.15, and below there a further fall to 10.50 would be likely. Despite the recent deterioration it would be prudent to cover at least half of any Rand requirement now to reduce risk. No one knows whether this is just the start of a sterling crisis, and all evidence points toward a lower pound.
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