Foreign Currency Market Update – GBP / ZAR Update
In a landmark week for the Pound Sterling to South African Rand exchange rate, the GBP/ZAR currency pair climbed to its strongest ever level as a result of developments in China and discontent in the SA gold mining sector.
The GBP/ZAR exchange rate steadily advanced over the course of last week, climbing from a low of 19.6787 to hit an unprecedented high of 20.1983, with the pairing managing to hold gains in spite of the publication of disappointing UK average earnings and employment figures. The Rand also softened to a fresh fourteen-year-low against the US Dollar as a number of factors reduced demand for the emerging-market asset.
Early in the week the People’s Bank of China (PBoC) shocked markets by announcing a 2% devaluation of the Chinese Yuan. As China is one of the biggest importers of South Africa’s key commodities, the news that the nation’s purchasing power would be significantly reduced inspired an immediate Rand sell-off and saw commodity prices tumble. Further Yuan devaluations followed, with the currency weakening by 5% in just three days.
The Rand’s downtrend against peers like the Pound and US Dollar was also due to the prospect of wage-related strikes in South Africa’s gold sector. The nation is already limping through its worst energy crisis since 2008 so a halt to production in one of the country’s main sectors would add to its darkening economic outlook. Last Thursday the National Union of Mineworkers (NUM) and the Association of Mineworkers and Construction Union (Amcu) – two of the gold industry’s largest unions – asserted that wage discussions had broken down, increasing the possibility of strike action.
Conflicting speculation surrounding the Federal Reserve’s interest rate outlook was another factor driving the Rand lower. Although the latest developments in China left many industry experts betting that a September adjustment is now out of the question, there are still hopes that the Fed will make a move before the close of the year. The central bank has made it clear that the path interest rates take will be directed by domestic data and last week’s US industrial production numbers impressed.
Although the Rand was able to find its footing on Monday as the Chinese Yuan stabilised, it extended declines against the Pound as a high-profile Bank of England (BoE) policymaker talked up the possibility of UK interest rates being revised sooner-rather-than-later. Monetary Policy Committee (MPC) member Kirstin Forbes stoked rate speculation by implying that borrowing costs need to be raised before UK inflation starts edging to the BoE’s 2% target and that holding them lower for too long will have a negative impact on the country’s economic outlook. The GBP/ZAR exchange rate could achieve a fresh high on Tuesday if the UK’s Consumer Price Index surprises expectations for a monthly decline of -0.3% and an annual reading of 0.0%. However, a move back into deflation territory could give the Rand a chance to rally ahead of Wednesday’s South African inflation and retail sales figures.
On Monday the Pound Sterling to South African Rand exchange rate was trending in the region of 20.1250.
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