Foreign Currency Market Update – GBP / ZAR Update
After the UK’s Public Sector Net Borrowing narrowed by a greater degree than forecast last week and bolstered the Pound, the GBP/ZAR exchange rate was shored up by a disappointing South African inflation report. Traders had been anticipating a strong improvement in inflationary pressure in September, with the year-on-year reading expected to rise to 4.9% and edge closer to the higher end of the South African Reserve Bank’s (SARB) target range. However, as inflation stagnated at 4.6% markets were not inclined to react favourably, pushing down the Rand as the GBP/ZAR pairing went on a bullish run.
Although South African Retail Sales posted stronger gains than forecast, rising to 3.9% growth on the year, the Rand was held on a downtrend by the dovishness of Finance Minister Nhlanhala Nene’s commentary in the nation’s Medium-Term Budget Policy Statement. Domestic growth expectations were slashed to 1.5% from 2% as the longer-term outlook of the South African deficit was also pared back. With metal prices remaining under pressure amid global slowdown concerns, the prospects of the Rand do not appear to be overly optimistic, spurring the GBP/ZAR exchange rate to a then-weekly best of 21.0178.
While Friday saw general market risk appetite fluctuate on the back of an unexpected interest rate cut from the People’s Bank of China (PBoC) the action failed to buoy the Rand significantly. Traders remained unconvinced that this latest monetary intervention would be enough to prevent a hard landing for the world’s second largest economy, which prevented commodity prices appreciating too strongly.
Sentiment towards Sterling wavered somewhat on Monday after the BBA Loans for House Purchase figure defied expectations, slumping to 44,489 rather than showing a minor uptick to 47,400. Suggesting that the UK housing market remains fragile, this did not offer much encouragement to pundits ahead of Tuesday’s more crucial UK GDP reading. In spite of the third quarter GDP falling short of forecasts, with economic growth having slowed to 0.5% on the quarter as the construction industry contracted sharply, the GBP/ZAR exchange rate has nevertheless continued to strengthen and approached a three-week best of 21.0313 before the close of the European session.
The softness of the Rand persisted as the South African Unemployment Rate rose further than anticipated this morning, increasing from 25% to 25.5% in the third quarter. With the nation’s credit rating in line for a downgrade, as Moody’s Investors Service and Fitch Ratings appear to be preparing to drop their assessment of South Africa to the lowest investment-grade level, this does not amount to any particular incentive to buy into the Rand.
Later in the week the domestic September Producer Price Index and Balance of Trade figure may offer some limited support to the ailing currency, particularly as the South African trade deficit is expected to narrow significantly. Nevertheless, as commodity prices remain weak the GBP/ZAR exchange rate seems likely to remain on an uptrend through the coming days
Heads Up
Summary of major upcoming data releases that we think may move the market.