Foreign Currency Market Update – GBP / ZAR Update
‘Black Monday’ saw emerging-market and commodity-driven currencies plummet, with the South African Rand dropping to its lowest recorded levels against both the US Dollar and British Pound. The Rand gradually recovered over the course of last week, with the GBP/ZAR exchange rate easing from a high of 21.2795 to a low of 20.1119 as investors largely ignored the UK’s sturdy second quarter growth data and stronger-than-forecast Consumer Confidence index and instead bet that developments in China would deter the Bank of England (BoE) from adjusting borrowing costs early next year.
These concerns were allayed slightly during the Jackson Hole conference held over the weekend. During proceedings BoE Governor Mark Carney asserted that gradually increasing underlying inflationary pressures are likely to warrant fiscal policy normalisation being considered ‘at the turn of this year’, though Carney did go on to add that the Chinese slowdown is likely to impact the size and frequency of any alterations. Although the Rand derived some support from dovish rate hike rhetoric from Federal Reserve officials, gains were limited as Chinese Manufacturing and Services PMIs failed to impress and the Pound Sterling to South African Rand exchange rate was left trading in the region of 20.4850 during Tuesday’s European session.
The UK might have published disappointing manufacturing data today, but South Africa’s was worse. Markit’s UK Manufacturing PMI had been expected to show modest improvement, with the gauge advancing from 51.0 to 52.0 in August. However, it actually eased to 51.5 as output growth slowed and the downturn in the UK capital goods industry continued.
While this result was below forecast and left the Pound trending lower against a number of its currency counterparts, Sterling was able to gain on the Rand after South Africa’s KAGISO Manufacturing PMI printed at 48.9 in August, down from 51.4 in July and lower than the 49.5 projection. This move into contraction territory was hardly surprising given recent events, but the data still undermined demand for the Rand and saw the South African asset give up earlier gains against the Pound and US Dollar.
As the week progresses South Africa’s Standard Bank PMI and the UK’s Construction and Services PMIs will have a moderate impact on GBP/ZAR trading.
However, investors will also be keeping a keen eye on data from the US. Should this week’s major reports (including the ISM Non-Manufacturing PMI, Factory Orders numbers and Non-Farm Payrolls report) support the case in favour of a 2015 interest rate adjustment from the Federal Reserve, the Rand may well return to trading close to historic lows against the Pound.
Heads Up
Summary of major upcoming data releases that we think may move the market.