Foreign Currency Market Update – GBP / ZAR Update
The Pound Sterling to South African Rand exchange rate was trading in the region of 18.4680 on Tuesday as domestic GDP data out of Africa’s second largest economy put pressure on the Rand. Volatility for the currency pair is forecast as market attention turns to US data releases.
According to the South African Statistics Office, Gross Domestic Product (GDP) grew at a slower pace in the first quarter of 2015 as power outages and worker unrest curbed manufacturing production and eased farming output. The data showed that GDP expanded by 1.3% on a quarter-on-quarter basis, a sharp drop from the 4.1% rise seen in the final quarter of 2014 and below economist expectations for a growth rate of 1.7%. On an annual basis, the nation’s GDP expanded by 2.1%, better than the previous figure of 1.3% and in line with forecasts.
The biggest contributor to the slowdown was the 21-days of rolling blackouts implemented by state-owned utility company Eskom. The utility struggled to meet power supply demands as South Africa’s ageing infrastructure creaked under the pressure. Because of the power cuts, manufacturing activity was shown to have fallen at an annualised rate of 2.4% in the first quarter. Agricultural output, meanwhile, fell sharply by 16.6%.
‘On the production side of the economy, output growth has been adversely affected by structural issues relating to electricity supply shortages. Another key contributor has been the weak external demand growth in world trade volumes,’ said an economist.
The data did little to suggest that the South African Reserve Bank (SARB) will take monetary policy action and alter the nation’s interest rates. Slowing expansion and a low inflation rate mean that the bank is likely to leave rates unchanged at 5.75%. The bank also revealed that it has cut its economic growth forecasts for the year. It now expects the South African economy to expand 2.1%, down from the previous expectation for a growth rate of 2.2%.
The South African Rand is set to remain under pressure, as the strength of the US Dollar will continue to weigh upon emerging-market assets. Comments made by Federal Reserve Chair Janet Yellen caused investors to raise their bets that the US central bank will hike interest rates before the end of this year. If upcoming US data releases due later in the session comes in positively the South African Rand is forecast to weaken
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Summary of major upcoming data releases that we think may move the market.