What Brexit means for the pound, dollar and rand in relation to each other

What Brexit means for the pound, dollar and rand in relation to each other

The recent vote by Britain to leave the European Union — commonly referred to as Brexit — has put the value of the pound under pressure.

The pound hit a level of weakness last seen 30 years ago against the US dollar. Amazingly, it was the worst-performing currency in the world in June after the Brexit vote. That has translated into rand strength against the pound.

The rand/pound exchange rate broke below the weakening trend that had been in place since 2011. That trend was broken when the rate dipped below R20.50/£ at the end of June. It’s likely that there will be some further slide in the British currency in months to come.

In the immediate future there could be a minor reflex bounce in the value of the pound, but on the whole the technical picture is likely to deteriorate further. Any small bounce towards R20.00/£ will probably present an opportunity to act on the assumption that the rand will gain value versus the pound. From a technical perspective there is a major congestion zone between R17.50 and R18.50. That is an area where the rand/pound exchange rate looks to be headed. It’s likely that rand strength will be arrested in that area between R17.50 and R18.50.

So if the rate bounces to about R20.50/£, it could be a chance to buy rands in anticipation of a rate around R18.50/£.

The break below the trend from 2011 is likely to put the rand on a strengthening path versus the pound for a while to come.

The US dollar index was covered in this column in May. This is an index of the dollar versus a basket of other developed market currencies and is a good measure of the dollar’s broad value.

In May the index had just reversed up off the lower edge of a trading range that has been in place since early 2015. At the time it was suggested that the dollar was likely to strengthen further — and it has.

Updating this chart reveals that there is an inverted head and shoulder pattern evident and that pattern has been validated by the break above the neckline of the inverted structure at 95.00. That pattern points to further dollar strength to a target of 98.00.

Brexit has resulted in the dollar strengthening against the pound. The dollar/pound cross makes up about 12% of the weighting of the US dollar index, so the sudden knock to the pound has strengthened the US dollar index by about 2%.

The fact that the pound looks likely to weaken further and that the chase for safe-haven US bonds and stocks remains in full force suggests that the dollar will continue to firm.

Keep in mind that a strong US dollar typically works against emerging market stocks and commodities. Those asset classes may feel the impact if the dollar strengthens materially and the index heads back up towards the upper end of the 18-month range at 100.

The pound hit a level of weakness last seen 30 years ago against the US dollar. It was the worst-performing currency in the world in June