TALKING TECHNICALS

And things aren’t looking good for the rand

Brexit key to pound’s fate. And things aren’t looking good for the rand

Brexit has dominated global headlines on and off for almost three years as the March 29 deadline approaches for the UK to leave the EU.

The whole process has been a sordid mess as UK MPs have stumbled to get a satisfactory Brexit deal over the line. No such luck at the time of writing. Despite countless back-andforth trips by Prime Minister Theresa May between London and Brussels, she has been unable to negotiate a Brexit deal that meets the UK parliament’s approval.

No deal has been agreed on. But the UK parliament has decided that the UK cannot leave the EU without a deal. The EU has made it clear that the final deal presented to May was as good as the UK would get. Take it or leave it.

So now the process has been kicked out for a few more months. The options remain open at the time of writing. A UK general election? A second referendum? No Brexit at all?

The uncertainty is weighing on the UK economy. Many large corporates and manufacturing enterprises have had to restructure their operations out of the UK in the event Britain leaves the EU.

The value of the pound has come under major pressure.

The pound now is 10% weaker against the dollar than it was before the Brexit vote in June 2016. But there are signs that the pound may have the potential to break stronger in the near term. This could happen if a suitable Brexit deal is struck, or if Brexit is cancelled.

Since December, the pounddollar rate has appreciated from 1.25 to the current area around 1.32. There appears to be a large inverted head-andshoulders pattern evident with a neckline at the 1.33 level. If that pattern were to validate with a move above 1.33, that would point to a target of 1.4, some 6% stronger than present.

A favourable Brexit outcome (or no Brexit) would likely be the catalyst for such a move.

But if the UK were to crash out of the EU with no deal (now seemingly impossible), the pound may move weaker. A break below 1.28 would imply a failed inverted headand-shoulders pattern with bearish potential back to 1.25 and even 1.2.

Recent events seem to favour of a potential break stronger by the pound. Goldman Sachs is bullish on the pound into the end of 2019.

The rand recently made a rather bearish technical break through R14.25 to the dollar. That level is where the upper boundary of a channel from August comes into play. From a technical perspective, this technical damage points to potential for further weakening in the rand, or strength in the dollar.

Many will blame domestic reasons — such as the woes at Eskom and the weak economy — for the rand’s weakness. But they account for only half the story. The dollar has also been strengthening recently and that has contributed to part of the rand’s weakness.

From a technical perspective, the break above R14.25 suggests that the odds favour further weakening by the rand. A move towards the R15 area is looking increasingly possible, with a re-test of September’s weakest level at R15.50 not impossible.

Only a strong rebound below the R14 level would negate the bearish stance for the rand. For now, the current technical picture points to potential for further near-term weakness.