Foreign Currency Market Update – GBP / ZAR Update
The US Dollar to South African Rand (USD/ZAR) exchange rate slipped to a 13 ½ year low last week as US data buoyed the ‘Buck’ and the Rand lost investor favour along with a host of other emerging-market currencies. The US Change in Non-Farm Payrolls stat came in at a massive 280K in May rather than the 226K forecast, which allowed the US Dollar to climb while riskier currencies such as the Rand sank. However, both the Pound Sterling to South African Rand (GBP/ZAR) and US Dollar to South African Rand (USD/ZAR) exchange rates remained in a narrow range on Monday as the Rand stabilised. Fitch credit ratings agency allowed the Rand some support when it left South Africa’s sovereign credit rating at BBB rather than downgrading it as many industry experts had forecast.
One aspect weighing on the South African economy is the nation’s unstable electricity supply, which sees frequent blackouts taking place and reduced factory output. Additionally, Fitch cut South Africa’s economic outlook for both 2015 and 2016 and stated the nation’s negative outlook was a result of softer Gross Domestic Product (GDP) growth and a consistently high budget deficit. Fitch commented: ‘Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood of leading to an upgrade.’
The South African government is now paying close attention to electricity supply constraints after Fitch’s economic growth downgrade. Eskom, once hailed one of the world’s best-run power utilities is being grilled as to why the blackouts are still occurring. Newly appointed chief Brian Molege stated that after the institution had run its plants into the ground to keep up with increasing demand, Eskom was building new power stations for a more productive future. Both Standard and Poor’s and Moody’s credit ratings agencies have downgraded Eskom’s rating to junk status (non investment grade). However, the power outages are likely to continue for another two to three years as Eskom attempts to repair and optimise current plants as it builds new ones.
By way of data, the South African Rand will have several opportunities to move this week, starting with Wednesday’s SA Business Confidence report. The sentiment index is forecast to slip from 49 to 47 in the second quarter – a result which could see the Rand exchange rate soften if correct. Thursday’s SA Mining Production and Manufacturing Production ecostats will also offer the Rand exchange rate a moderate opportunity to move. The annual Mining Production stat is forecast to fall from 18.8% to 7.6% in April, while the Manufacturing Production stat is predicted to soften from 3.8% to 1.2% on the year.
The US Dollar to South African Rand (USD/ZAR) exchange rate is trading at 12.5696. The Pound Sterling to South African Rand (GBP/ZAR) exchange rate is trending in the region of 19.1570.
Heads Up
Summary of major upcoming data releases that we think may move the market.