SA Rates work well for the UK Pound

So the weaker Rand against the pound - thats interesting.

Sterling has managed a stellar recovery against a very weak Rand since New Year.

The 9% rally in the exchange rate has been prompted by a general shift in investor risk appetite.

The high yielding currencies had been doing well in Q4, and the Rand enjoyed the same kudos as the Aussie dollar even while the South African Reserve Bank are in rate cutting mode.

A slide in the gold price (which came off its $1,430 per ounce peak over New Year and now trades around 6% lower at $1,336) impacted sentiment toward the high yielders, and as we know well from experience over recent years, these currencies tend to rise steadily and then suffer sharp setbacks when investors sense trouble.

The so called "carry trade" has been largely responsible for the inexorable rise in the Aussie dollar and Rand, and when traders unwind these positions the currencies come under short term selling pressure. A carry trade is where investors borrow in a low interest rate currency and change the money for higher yielding currencies. The bet works well as long as the high yielding currency rises. A fall in the high yield currency can cause a stampede as traders head for the exit. That's what we've seen over the last few weeks in the Rand.



In the UK inflation and interest rates were the dominant theme last week after news that the Consumer Prices Index rose to 3.7% in December, well ahead of the forecasted 3.4% rise. Retail prices (which include a wider basket of goods including housing costs) rose to 4.8%. The inflation figures prompted traders to consider the possibility of interest hikes sooner than previously expected. Then we heard this week that fourth quarter GDP growth was - 0.5%, which makes any notion of a near term rate hike extremely unlikely as the economy flirts with recession. Bank of England governor Mervyn King added weight to the case for no rate hikes when he commented that any rise in rates would not be helpful.


South African consumer prices rose 3.5% in December, giving the central bank plenty of scope to keep interest rates on hold at 5.5% at last Thursday's policy meeting. The last change in the bank's benchmark rate was a cut on November 19th from 6%.


The technical outlook is still precarious for Sterling. We've seen these sharp rallies dissipate all too often over the last few years as investors invariably head back into higher yielding assets. The market has found resistance around the 11.27 level, which marked the high back in November. If Sterling could manage a daily close above there it would open the way to our next key resistance level at 11.75. Buyers of the Rand should strongly consider covering any requirement now, locking in the 9% gain we've seen over the last 3 weeks. This has been the sharpest rally since November 2009.






Market Analysis by Jon Beddell thanks Mate!!