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

Financial Mail - Investors Monthly - - Contents - GARTH MACKEN­ZIE www.trader­scorner.co.za

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

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