The South African Rand is seen struggling against the Pound amidst fresh fears concerning the future of the country's credit rating.

A report out from Moody's this week flagged ongoing structural growth concerns and worries over the independence of the South African Reserve Bank (SARB) as being potential triggers of a downgrade to bonds denominated in the domestic currency.

Recall, SA bonds denominated in foreign currencies have been downgraded to junk, but 80% of all bonds issue by the government are issued in Rand. These are still at investment-grade status.

But, there are clearly risks to the status of these bonds.

The country is now teetering on the edge of being downgraded to sub-investment grade which would be woeful for the Rand.

“Should the agency decide to downgrade SA, the local and foreign currency credit ratings will be in the sub-investment category — this will leave only S&P to downgrade for the country to be removed from the coveted World Government Bond Index,” continued the RMB analyst.

The Pound, meanwhile gained ground due to Chancellor, Philip Hammond, taking a softer line on immigration, however, those gains may prove temporary, as other forces within the cabinet continued to promote a harder line on freedom of movement and Brexit.

Technicals: More GBP/ZAR Strength?

In our previous update, last week, we thought the Pound to Rand might be forming a triangle as illustrated in the chart below, however, price action since then suggests otherwise.

Instead, the exchange rate has consolidated its break above the major multi-month trend-line and is forging higher- reinforcing the expectation of the Rand falling.

It has now reached the level of the previous 17.5983 highs – peaking at only two points above, at 17.5985 before pulling back to the current 17.4913 level.

Thus a much more bullish scenario is evolving than we had counted on.

We now see a much higher probability of more upside evolving from here.

The extent of the follow-through higher after the trend-line break is usually calculated by taking the move immediately before the break (a) and extrapolating it higher (b) – which suggests an extension to roughly 18.0000.

For confirmation, however, we would want to see a move above the 17.5985 highs.

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