The South African Rand "faces a tough fourth quarter," according to a prominent analyst we follow, a call that if correct would allow the Pound-to-Rand exchange rate to retest August highs.
"South Africa's volatile rand could be in for a rough ride through the last quarter as risk appetite is curbed by a number of factors," says Peter Stoneham, a Reuters market analyst.
How long this decline extends will provide the predominant steer to the Rand's price action over coming days and weeks.
"China is again at the epicentre as investors tread cautiously around fading growth, reduction in democracy, regulatory measures and stricter rules for debt, especially borrowing for speculative purposes," says Stoneham.
But a growing headache for investors is the surge in global fuel and energy prices, which have raised the spectre of an extended period of high inflation levels.
This has in turn prompted fears that central banks will be forced into raising interest rates in order to ensure higher inflation levels do not become entrenched over the medium-term, as suggested by the Bank of England's Governor Andrew Bailey on Monday.
The risk of doing so is that raising interest rates cools growth further.
Investors are therefore looking at a scenario where inflation is surging and growth stalling; could stagflation be making a comeback?
Indeed, Chair of the U.S. Federal Reserve Jerome Powell will reportedly tell U.S. senators on Tuesday that he believes inflation will stay elevated for a longer stint than previously expected.
Powell will offer this expectation as a justification for signalling last week that a reduction in the Federal Reserve's quantitative easing programme would likely commence in November (tapering), with the programme now likely to be completed by mid-2022.
"A more hawkish take on the U.S. Federal Reserve's taper timing is the other linchpin for risk markets and the ZAR's volatility will only increase as speculation mounts over a possible move as early as November," says Stoneham.
The yield paid on government and corporate bonds have risen as a result.
For the Rand this provides a mixture of negative conditions: South Africa is already highly sensitive to rising fuel import costs, therefore Brent crude pushing $80/barrel again - for the first time since 2018 - will add to economic headwinds.
The rise in U.S. bond yields will meanwhile raise the cost of global financing and help the U.S. Dollar appreciate, a negative development for Emerging Market assets such as the Rand.
Turning to domestic issues, Stoneham is conscious that politics will ping the radar as parties release their manifestoes ahead of November's municipal elections – "a further driver of risk volatility".
According to Stoneham's technical studies the Dollar-to-Rand exchange rate ( USD/ZAR ) is in a strong upswing and although corrective action is likely a run back to the 15.3950 August high looks achievable in October.
The Pound-to-Rand exchange rate would rise in tandem with USD/ZAR and we can therefore establish an objective for the pair:
Above: GBP/ZAR daily (top) and USD/ZAR daily (bottom).
If the USD/ZAR were to peak at the August high, as Stoneham anticipates, then a similar target is seen for GBP/ZAR.
As the above shows, the peak would be 20.9520.
Stoneham does however say the longer-term picture shows potential for a sizeable recovery for the South African Rand in 2022 or into 2023, "but the remainder of 2021 is likely to be tough".
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