by Jon Beddell
Foreign Currency Market Update – GBP / ZAR Update
Last week the Rand ended a losing streak that saw it decline 4% versus sterling so far this month. It was UK growth figures that put the brakes on the pound’s rally, but the reversal also coincides with key technical resistance at the 11.50 level. That level was an important low back in October, and having broken decisively below it in March the market has been testing it from below over the last two weeks. Commodities also had a good day on Friday, giving the Rand a useful tailwind. Gold and platinum account for 22% of South Africa’s exports. Also helping the currency is a consensus that the reserve bank will refrain from cutting interest rates at the May 13th meeting, electing instead to keep rates steady at 6.5%.
Britain’s economy grew by just 0.2% in the first quarter of 2010, much less than the 0.4% expected by analysts. The soft data released on Friday had an immediate impact on sterling, which retreated sharply from the 11.50 level. Having digested the growth data over the weekend, investors decided that there’s a good chance of it being revised higher for the final reading. Also helping to cushion the blow is the fact that retail sales skewed the figures after being hit by the particularly harsh winter.
The Greek debt situation continues to weigh on currency markets. On the one hand investors applauded on Friday when Greece indicated that it would activate the aid package; but the Euro has softened again today as doubt over the when and how of aid delivery begin to fester. The Greek finance minister yesterday promised that the €45bn aid package would be available in time to avoid a debt default. Greece is scheduled to repay €11bn by the end of May.
It’s a big week ahead for the US data calendar, with the latest interest rate announcement from the Federal Reserve on Wednesday, followed by the first quarter growth figure on Friday. Interest rates are almost certain to stay on hold at the record low of 0.25%, but investors will be watching closely for any change in language. Specifically, the Fed’ have made a habit of stating that rates will remain low for “an extended period”. Markets are hanging on to that key phrase as a sign that rates will stay unchanged for the next few months. Dropping that phrase would therefore be the Fed’s warning to the market that a rate rise is on the way, and would negatively impact the high yielding currencies, which at present are continuing to benefit from investor risk appetite and the lack of yield on the US dollar. Analysts are expecting an annualised growth rate of 3.5% in the first quarter, compared to 5.6% in the last quarter of 2009. Interest rates aside, positive US economic data tends to add to the allure of the high yielding currencies. Investors take good US news as a sign of global recovery, and perversely, they sell the US dollar and buy currencies like the Rand as appetite for risk increases with their confidence in the economic outlook.
The technical outlook is negative for sterling unless we can make a decisive break above the 11.50 resistance. So far the pound has been unable to do this. Buyers of the Rand should take a cautious approach and consider covering their exposure at current levels.
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