Foreign Currency Market Update – GBP / ZAR Update
Over the past week the South African Rand has generally softened versus its major peers. The Pound Sterling to South African Rand (GBP/ZAR) exchange rate, for example, has moved from a low of 19.0385 to a high of 19.4091 since July 1st. One major stumbling block for South African economic growth has been the ongoing difficulties regarding South Africa’s largest energy provider, Eskom. For a long time Eskom has struggled to meet with demand on an aging grid, with faulty equipment and unhappy staff exacerbating the situation. A recent bid to hike rates was quashed by the courts and the company face total collapse without emergency assistance. Load shedding and rolling blackouts have become a common occurrence; costing the South African economy an extraordinary amount in the process.
One positive for South Africa over the past week has been relatively positive ecostats. Of particular significance was the KAGISO Manufacturing PMI which increased from 50.8 to 51.4 in June; bettering expectations of a drop to 50.37. Crucially, this has brought manufacturing output further away from the 50 mark which separates growth from contraction. On the whole, however, manufacturing output remains subdued with the issues surrounding Eskom leaking into all economic sectors and muting domestic demand.
The Pound Sterling to South African Rand (GBP/ZAR) exchange rate advanced by over 0.50% in the early stages of Tuesday’s European session.
Over the past few days the Rand declined versus its major peers in response to the escalating crisis in Greece. Aside from the fact that the South African Rand tracks the single currency, the Rand also depreciated in response to dampened market sentiment. With so many uncertainties surrounding the Greek crisis, desire for safe-haven assets has caused the US Dollar to advance irrespective of domestic data. In general, when the US Dollar gains; emerging-market currencies such as the South African Rand decline. The combination of damp market sentiment and long-running Eskom issues caused the Rand to tank versus its major rivals on Tuesday.
Looking ahead, Thursday’s South African data has the potential to provoke Rand volatility. May’s Mining and Manufacturing Production data is due for publication, and it will be interesting to see whether manufacturing production correlates with the KAGISO reading. Mining Production is always significant for the South African Rand given that mining is one of South Africa’s key industries. It is fair to say, however, that domestic data may not have a particularly significant impact with geopolitics in Europe driving trade. Provided the US Dollar holds a position of strength and the common currency continues to decline, the South African Rand is likely to hold a weak exchange rate. With that being said, any positive developments with Eskom have the potential to stoke demand for the South African asset.
The Pound Sterling to South African Rand (GBP/ZAR) exchange rate was trending in the region of 19.3990 on Tuesday morning.
Heads Up
Summary of major upcoming data releases that we think may move the market.