Brexit pushes rand into massive recovery against the British pound

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The rand has seen a 25% recovery against the British pound since January, after Britain voted to leave the European Union on June 24.

“The rand has certainly been doing well,” said RMB analyst John Cairns on Monday. “The fall in (the pound to rand exchange rate) has been the most impressive, with moves below 19 last week implying a 25% recovery from the worst levels seen in January.”

The rand’s depreciation in January followed growth fears in China, lower global demand in commodities and waning risk appetite for South Africa following the leadership crisis in National Treasury in December 2015.

While the rand’s recovery against the pound was positive, it became increasingly volatile after the UK’s decision to exit the EU, also known as Brexit. On June 24, when the vote’s results were released, the rand plunged more than the day President Jacob Zuma fired former finance minister Nhlanhla Nene, also known as Nenegate.

Cairns said the euro/rand exchange rate is the next pair that needs to break lower. “The April low of 16 is in sight, (and) a break here would take the rand to the best levels since Nenegate.

“The biggest question is whether USD/ZAR can break its 14.10 to 16.00 range,” he said. “This is ambitious at this stage. The market has traded 14.46 to 14.97 over the past two weeks and while the bias is lower, it is not particularly strong.”

On Monday at 08:20, the rand was trading 0.45% stronger against the euro at R16.11, 1% stronger against the pound at R18.9 and 1.38% stronger against the dollar at R14.59.

Brexit fears decline

Brexit fears have dropped away sharply, Cairns said on Monday.

“The fear-gauge index of expected volatility has fallen all the way to 13, the lowest in a month,” he said. “Even (the) sterling has stabilised.

“There will still be real economic costs from the vote,” he said. “The extent will only be clear with time, but there is no major concern yet.”

Cairns said attention will now focus on how policymakers will respond to the Brexit vote. “The BoE (Bank of England) is the focus this week, the ECB (European Central Bank) next and the (US) Fed at the end of the month,” he said.

Meanwhile, NKC Research said on Monday that it shared Moody’s analysis that while South Africa will be the most affected in sub-Saharan Africa by Brexit, it is not likely to have an impact on its sovereign debt rating.

“Of key risk is private sector capital flows to South Africa, on which (the) country relies in order to finance large current account deficit,” it said. “Foreign direct investment and tourists to South Africa from United Kingdom are likely to fall as a result of the Brexit vote.

“(The) ratings agency’s views align with our own analysis, in that the primary factor stemming from Brexit that will touch South Africa over the short to medium term is increased risk aversion and volatility in global financial markets.

“However, South Africa has plenty of obstacles on the home front, including very weak economic growth in an environment of rising inflation and interest rates.”

 

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