Market Forecast - Sterling Vs. South African Rand 19/10/09
Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" on Thursday morning. A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses.
This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly. The Sterling Rand rate moved from 11.55 up to 12.00 in two days, erasing the previous seven days' losses. However, it's too early to suggest that this signals a turning point. Against a backdrop of strong commodity prices (in particular gold which continues to trade near all time highs) it is difficult to bet against the Rand when South Africa is the world's largest gold producer.
There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.
The technical outlook remains negative. The trend is still clearly down, and recent months have been characterised by gradual declines punctuated by short sharp rallies. This latest rally looks the same as previous ones, and it would take a break above 12.36 to end the series of lower highs and actually call the down trend into doubt.
Market Forecast - Sterling Vs. South African Rand 07/10/09
Sterling fell again yesterday after an unexpected decline in manufacturing during August. Output fell 1.9%, the steepest decline since January. Analysts had been expecting a small rise.
Sentiment towards the pound had improved marginally last week as traders started to look forward to this month's Bank of England meeting this Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that was overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime making it difficult for sterling to stage any sustainable rally. Data flow was mixed. The IMF upgraded its 2010 growth forecast for the UK (to 0.9% from 0.2%), but soft manufacturing data for September surprised to the downside as market watchers expected better figures off the back of higher exports. The Confederation of British Industry's retail sales figure was better than expected, and the final revision to Q2 GDP saw an improvement to - 0.6% from previously published -0.8%.
The commodity currencies have an extra tail wind this week. Gold is soaring to all time highs today (currently $1040 per ounce), and oil is also being dragged higher. South Africa being the largest gold producer in the world, that gives the Rand a further boost and is helping the currency surge higher against the weak pound. We are now testing the recent low at 11.75. Sterling has broken new lows against other commodity currencies in the last few days, so there is no reason to think that we won't see this exchange rate trade even lower.
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