Can you believe it?
Two years ago, the rand would have cost you R20 for one pound.
Due to local reasons, at the time, we saw the unsettling cabinet reshuffles, nepotism and corruption on our former president.
And early this month, we saw the rand hit R20 to the pound yet again.
Only this time we are seeing local and international factors for the rand's slump and worse - future weakness to come.
Unfortunately, R20 to the pound is only the beginning as I now expect the rand to weaken to R22.12.
Today I want to discuss this bold prediction for the pound and how you can profit as a trader.
Let's get into it.
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Reasons why the rand has crashed against the pound
#1: We are in a ‘technical’ recession
Early this month, South Africa was said to be in another 'technical' recession.
A technical recession is when an economy endures two negative consecutive quarters of economic performance.
With the disappointing manufacturing numbers, sharp decline in the auto-motive sector and with a decline in GDP, we are definitely seeing a shrinkage in economic output.
Investors are finding it safer and more lucrative to get their money out of the South African rand and into stronger currencies like the Pound.
#2: Weaker emerging markets
This reason is in my mind a little unfair, but it is what it is…
According to Forex Director for Sable International, James Edwards, "South Africa is caught up in a whirlwind of financial uneasiness affecting all global emerging markets:" This means that the international market instability is being blamed for the rand's weakness.
Investors are dumping their positions from emerging markets and then re-depositing their funds in major currencies like the US dollar, Yen and the Pound.
The most concerning factor in my mind is what is going on with the charts.
Why I expect the rand to drop to R22.12 against the Pound
The Pound against the South African rand (GBP/ZAR) has formed a Rounding Bottom breakout pattern since early 2017.
This is where price moves in a pattern that resembles a half pipe or a bowl.
The first half of the Rounding Bottom was created by the sellers (Bears). This resulted in the pound weakening to a low of R16.06.
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The second part of the Rounding Bottom formed because of the buyers (Bulls).
They are the ones who managed to move the pound from the lows of R16.06 and drive the price up to R19.09.
As of last week, the price broke through the high of R19.09.
This breakout tells me that the momentum will now drive the pound higher. To calculate the target we’ll use the highs and the lows of the rounding bottom.
Target = (High – Low) + High
= (R19.09 – R16.06) + R19.09
This means, we can expect the rand to weaken to R22.12 from where we are.
It sounds scary if you’re considering a holiday to the UK, but there are opportunities that lie in this prediction.
What you can do to profit from the pound strength
You can either go long the GBP/ZAR mini CFDs and hold until it hits the target of R22.12.
Or you can look at buying CFD trades on the JSE dual-listed companies based in London, which run up when the Pound strengthens.
I'm talking about stocks like Glencore, Billiton, Anglo and Richemont.
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