Foreign Currency Market Update – GBP / ZAR Update
Market Update – GBP ZAR
The Pound Sterling to South African Rand exchange rate firmed to a session high of 18.2660 on Tuesday as the UK markets re-opened following the bank holiday weekend and as domestic data out of Africa’s most developed economy weighed upon the Rand. Ongoing worries over electricity supplies, civil unrest and a weakening economy also continued to put pressure on the South African Rand.
On Monday, the Rand weakened against most of its major peers as the Kagiso Purchasing Managers Index (PMI) showed that activity in South Africa’s manufacturing sector deteriorated to four-year lows in April. The PMI fell from the reading of 47.9 recorded in March to 45.4 in April. In a PMI, any number below 50 indicates contraction, whilst a number above indicates expansion. The prime cause for the PMI’s decline was the four-point drop in the business activity sub-index, which fell to its lowest level since July 2011. The employment sub-index also remained well below the 50 mark by slipping to a reading of 45.2.
The main cause for the decline in manufacturing activity was blamed on the amount of power cuts being implemented by utility company Eskom. With South Africa’s power grid under immense strain, the power company has been forced to introduce load shedding and rolling black outs. With winter coming in the southern hemisphere, demand for electricity is set to increase.
‘While the manufacturing sector seems set to contract on a quarterly basis in the first quarter of 2015 (barring a remarkably strong performance in March), the April PMI suggests that a quick recovery is unlikely. In fact, conditions could worsen further in the second quarter. The power cuts not only directly hampered output, but also weighed on domestic demand and likely contributed to the 6.7 point drop in the new sales orders index which is at its lowest-level since August 2009,’ said Kagiso Asset Management head of research Abdul Davids.
The South African Rand is expected to remain under pressure against its major peers as concerns over anticipated strikes in the gold mining and public sectors look set to increase. In addition, pressure on the Rand and other emerging market currencies was increased by a PMI report out of China, which showed that manufacturing activity in the world’s second largest economy remained below the 50 line, which divides expansion from contraction.
On Thursday the Rand could regain some ground against the Pound Sterling as uncertainty over who will win the general election is set to create volatility for the UK currency. Also of interest will be Wednesday’s South African Consumer Confidence report.
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