- Summary:
- The pound to rand pair rose as the South African economy faces the biggest risks yet. The country's number of cases and national debt getting out of control
The pound to rand (GBPZAR) pair rose by 0.35% in the morning session as investors reflected on the worsening environment in South Africa. The USDZAR pair also rose by 0.45% while the EURZAR rose by about 0.21%.
South Africa coronavirus cases shoot
South Africa is in a fix. The vulnerable emerging market economy, which was in a recession before the pandemic, has been attempting to reopen its economy. In fact, the government has given most firms permission to go back to work.
The challenge is that the number of coronavirus cases in the country is still rising. On Saturday, the country confirmed almost 5,000 new cases, its biggest single-day gain. Yesterday, it reported more than 4,600 new cases.
The number of cases will continue to increase as the country reopens. All this means that the government could be forced to order another round of lockdowns in the future.
Pound to rand gains as deficit widens
The GBPZAR pair rose slightly as more concerns about the South African fiscal situation. In a speech to the National Economic Development and Labour Council on Friday, the finance minister warned that the deficit would widen to more than 100% of GDP in 2025. It will reach 114% before the end of the decade. This year, the ratio will climb to 80.5% of GDP compared with a projection of 65.6% in February.
He delivered the presentation a few days before he is expected to release a special supplementary budget. In it, he will redirect $7.5 billion of spending to help finance the previously announced fiscal stimulus. These numbers are in line with what Fitch, Moody’s, and S&P Global Ratings warned when they slashed the country’s credit rating. Mboweni said:
“In the absence of significant structural reforms, debt-to-GDP levels will increase to unsustainable levels over the next three to five years.”
Download our Q2 Market Global Market Outlook
GBPZAR technical analysis
The pound to rand (GBPZAR) pair is trading at 21.5226, which is higher than the open at 21.3300. On the daily chart, the price is slightly above the 100-day exponential moving averages. It is also between the 50% and 61.8% Fibonacci retracement level. Therefore, I expect the pair to breakout eventually. As it does, the key levels to watch will be the 50% retracement at 21.7232 and the 61.8% retracement at 21.2643.