The Pound to Rand exchange rate has come under focus after Moody’s credit rating downgrade of South Africa has left it in junk status. This situation has left policymakers in the rainbow nation confused as to what the latest blow to its economy will mean amid the coronavirus pandemic.
Moody’s rating downgrade follows those of Fitch and Standard & Poor’s, which had downgraded the economy in 2017. Policy paralysis, weak growth prospects, ESKOM’s power rationing, fiscal indiscipline and failure of implementation of the promises made in the last budget speech have all been cited as reasons.
South Africa will be delisted from the World Government Bond Index. This move may have the effect of seeing a flight of foreign portfolio investment from the country. With billions of dollars of invested funds now at risk, liquidation of government bonds by investors will see an oversupply of the local currency and demand for foreign currency to fuel this capital flight. This has the potential to send the Pound to Rand rates skyrocketing in the medium term.
South Africa presently bears the highest case burden of the coronavirus in Africa and the country is in the first week of a 3-week total lockdown as the government attempts to combat the coronavirus outbreak.
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The monthly chart shows that the GBPZAR has re-established the uptrend following the breakout from the ascending channel. The monthly candle has tested the 22.56688 resistance level (January 2016 low) but was unable to break through it.
A break of this level with a 3% upside penetration close allows the GBPZAR in the mid-term to target the 23.35124 price level, where the monthly candle of May 2016 found its top. Above this area, the candle of December 2015 forms tops at 24.42730, which is where the next resistance is expected to be found. The all-time highs of the Pound to Rand exchange rate can be found at the 25.15624 price area.
On the flip side, support can be found at the 21/58047 price level, and also at 20.35410. The latter has a speed bump ahead of it, found at the channel’s upper border. Therefore, the price must be able to break this barrier before attaining the 20.35410. Any of these areas are expected to provide a basis for dip buying, as the sentiment for the GBPZAR is presently bullish.