Foreign Currency Market Update – GBP / ZAR Update
The past five days have seen the Pound Sterling to South African Rand (GBP/ZAR) exchange rate advance from a low of 19.1724 to a high of 19.6988 – although the pairing has since steadied out at around the 19.5901 level.
Last week the Rand took a series of knocks as bullish Federal Reserve interest rate hike expectations, disappointing Chinese manufacturing data and slumping commodity prices reduced demand for the emerging-market asset and pushed it lower across the board. Global economic developments were added to by domestic concerns and the Rand continued trending in a broadly softer position despite the 25 basis point increase to South African interest rates announced last Thursday. At the time of the decision the head of the South African Reserve Bank (SARB) commented; ‘The Rand remains a significant risk factor to the inflation outlook, given the vulnerability of the Rand and long bond yields to possible US interest rate increases […] The committee is concerned that the failure to act against these heightened [consumer price] pressures and risks will cause inflation expectations to become entrenched at higher levels.’
The day before the SARB interest rate announcement, South Africa’s latest inflation figures delivered a dramatic surprise. While the rate of annual inflation had been expected to print at 5% in June, it actually only came in at 4.7% and some investors feared that the result would prevent a SARB rate hike. Although this proved not to be the case, the Rand remained under pressure.
While the South African currency languished at close to 14-year lows against the US Dollar, the GBP/ZAR exchange rate was additionally supported by UK news. Wednesday’s Bank of England (BoE) meeting minutes inferred that as many as three members of the Monetary Policy Committee (MPC) might be inclined to vote for higher borrowing costs in the August gathering. While Thursday’s below-forecast UK retail sales report did take the wind out of Sterling’s sails, a concerning contraction in the Chinese manufacturing sector prevented the British currency from making any inroads.
However, this week the Rand managed to claw back some of its recent declines against the Pound – despite the UK publishing positive second quarter growth data – and moved away from a 14-year low against the US Dollar. The Rand’s gains were triggered by a collapse in the Chinese stock market as investors speculated that fears relating to the world’s second largest economy might lead to the Federal Open Market Committee (FOMC) pushing back its timeline for increasing interest rates until December of this year at the earliest.
As the week progresses further South African Rand exchange rate movement may occur as a result of the nation’s unemployment, producer price and trade balance data. The rate of South African joblessness is believed to have fallen in the second quarter while producer price gains accelerated in June. Friday’s trade balance numbers are expected to show a sharp narrowing in the nation’s trade surplus – a result which would be Rand negative. However, while these domestic ecostats will be of interest, investors will also be paying close attention to Wednesday’s FOMC announcement. A dovish US central bank would be Rand-supportive while the inference that a September rate adjustment is still on the cards has the potential to drive the Rand to fresh lows.
Heads Up
Summary of major upcoming data releases that we think may move the market.