The dollar and the pound have strengthened and local factors count too
The rand is on a steadily weakening trend
The weekly charts of both the rand-dollar exchange rate and the rand-pound exchange rate clearly illustrate the steadily weakening trend that has been in place for the rand since 2011. In the four years since the middle of 2011, the rand has weakened by 72% against the pound and by 80% against the dollar. The outlook for the rand continues to look bleak from a fundamental perspective as well as a technical perspective.
Factors such as a gradually widening current account deficit, sluggish economic growth and poor political leadership continue to weigh on the rand. The threat of further ratings downgrades does not help matters and these factors are likely to mean that the rand remains on the back foot for the foreseeable future. Technically there is no denying the weakening trajectory of the rand, and as the saying goes “the trend is your friend” — or maybe not, when you are a South African watching our currency depreciate at an alarming rate.
The rand-pound exchange rate has been range-bound for the past year and a half, between R17,00 and R18,40. This sideways trading activity has allowed the long-term trend of rand weakness to catch up to the trading action and we recently saw the rand reverse off the long-term weakening trend at R17.50 in April. We’ve now seen the rand weaken back towards the top of the range and it is threatening to make a significant break weaker. The UK election result was a positive surprise which saw the pound strengthen against all currencies, the rand included. The Conservative Party’s clear victory looks set to put the pound on a strengthening path for the foreseeable future. This development corresponds with a powerful break stronger for the pound and will add to the factors that are driving the rand weaker. A convincing break beyond R18,40 for the rand-pound exchange rate opens an initial technical target of R19,50 but looking further out there is no reason to think the rand will not weaken beyond that level over time. Only a convincing break below R17,00 to the pound would begin to question the weak technical outlook for the rand. At this stage that looks highly unlikely and it’s more probable the rand will continue to weaken against the pound.
The outlook for the rand-dollar exchange rate is equally bleak. The exchange rate has been in a steadily weakening channel since mid-2011. The rand is currently testing its long-term weakening trend against the dollar at R11,70. This level corresponds with an area of lateral support at R11,70 that marked a previous area of resistance through December 2014 to February 2015. The R11,70 level is therefore a very meaningful technical level where there is a strong likelihood that dollars will be bought and rands sold. A reversal up from R11,70 will likely see the rand begin to weaken again. An initial target for any rand weakness would be R12,50, which was the recent weakest level, achieved in March 2015. A break beyond R12,50 could quite likely see the currency move towards the upper end of the long-term weakening channel at R13,50. On a medium-term horizon, the rand looks set to continue weakening against the dollar — particularly as the dollar is on a strengthening trend of its own against all currencies. Only a convincing and sustained break below R11,50 might begin to question the bearish outlook for the rand. That looks highly unlikely as things stand.
Local investors would be well advised to gradually diversify their investments to achieve offshore exposure, as has been suggested in this column many times over the past few years.