Pound Sterling Forecast

Anyone tracking the GBPZAR rate recently will have been in for a real rollercoaster of a ride. The rate has breeched levels not seen since August 2009! This is presenting a fantastic opportunity for anyone buying the Rand, but providing more of a headache for anyone selling the Rand. We have had over 7.75% movement between the high and the low in the last month. On a 2m Rand sale, you would get £11,738 less trading at the low, than at the high. Unfortunately the current trend looks to be further ZAR weakness. But why the massive movements? 

Well the Rand has been a major beneficiary (and is now a major loser) due to carry trading. This is where investors borrow money in a low interest bearing currency and invest in a higher interest yielding currency. The interest rate differentials are one of the main drivers of exchange rates. Quite simply generally the higher an interest rate is, the stronger that currency will be. For example the Aussie dollar has been at all time highs against the pound this year. The AUD interest rate is 4.5%, the UK rate is 0.5%. When investors invest in a country they have to buy that currency and the higher rates will generally attract more investment and hence more of the currency is bought. If you have any specific questions about what is driving your rate of exchange, not just on the Rand but also any other currency pairings, please feel free to contact me personally on jmw@currencies.co.uk or +44 (0) 1494 787 458, quoting JMW and PSF.

With the South African interest rate at 5.5% (previously at 6.5%), it has made the Rand particularly attractive for carry trading. Just like consumers will choose a bank account offering a good rate of return, the Rand has been seen as very attractive because of it’s higher interest rate. Combine this with the recent massive demand of South African natural resources (for China and expanding economies) and you can understand why the Rand had reached it’s strongest against the pound at 10.26 in December last year, it strongest since 2006! Well not even a year later and the Rand has completely devalued as investors flee this currency. But why?

Carry trading as mentioned above is only attractive when we see confidence in the global economy. When this confidence diminishes as it has done recently due to the Euro crisis you will see investors pull away from perceived riskier investments. In a way the Rands exceptional strength in the last few years has been it’s downfall. The recent strength of the US Dollar highlights the recent flight to safety in the face of the uncertainty in the global economy. You can therefore link the ongoing debt crisis (and reduced global confidence) to the ZAR’s performance.

I foresee there is an improved chance of ZAR weakness as investors concerns increase due to the uncertainty in Europe.  With no sign of an abatement in the crisis, Germany is now being affected too. German bonds were majorly undersubscribed last week and this shows investors are wary of investing in Germany due to it’s exposure to the crisis. The Rand will of course continue to be volatile but further continued strength looks unlikely. With so much movement in recent weeks it is really critical to make sure you are aware of what is happening and why. To be kept up to date of all the events that will affect the rate of exchange, not just on the Rand but also any other currency pairings, please feel free to contact me personally on jmw@currencies.co.uk or +44 (0) 1494 787 458.  Please quote JMW and PSF.

As well as writing on the blog I work for one of the UK’s leading foreign exchange brokerages and can help secure the very best rates of exchange. I have never had any trouble beating not only the banks but also other sources and moreover, our sepcialist service is designed to further enhance your rate of exchange by working with you to determine the best time to execute your transactions.

Once I know what you need to do and when we can start to look at the necessary strategies designed to maximise your rate of exchange.

I look forward to hearing from you.