Foreign Currency Market Update – GBP / ZAR Update
The GBP/ZAR exchange rate got off to a fairly positive start to last week, bolstered by the release of several solid October UK PMIs. Both the domestic manufacturing and services sectors surprised traders with better-than-forecast growth, with the construction industry remaining in a strong state of expansion in spite of a slight decline in the index. These positive numbers shored up optimism in the progress of recovery within the UK economy, raising hopes that the Bank of England (BoE) would take a more hawkish stance at Thursday’s policy meeting.
However, investors were ultimately disappointed as policymakers voted 8-1 in favour of leaving interest rates unchanged and the central bank’s latest Inflation Report proved equally dovish. The report revealed that the BoE expects inflationary pressure to increase at a slower pace, anticipating that the national target of 2% will not be reached until the third quarter of 2017. Governor Mark Carney did not seem in a particular hurry to begin monetary tightening, suggesting that interest rates could well remain static for another year.
While the Rand was able to capitalise on the ensuing round of Pound sell-offs, with the GBP/ZAR pairing slumping to a weekly-low of 21.0871, it was not long before the commodity-correlated currency experienced a sharp downtrend of its own. Friday’s US Change in Non-Farm Payrolls figure surpassed estimates, showing that 271,000 new jobs had been added to the domestic economy in October rather than the forecast 185,000. This bullish result indicated a decidedly greater degree of strength within the world’s largest economy, leading to a marked increase in the odds of a December interest rate rise from the Federal Open Market Committee (FOMC). Naturally the prospect of a stronger US Dollar saw markets shift towards a state of risk aversion, damaging the appeal of the Rand.
Over the weekend Chinese Imports were found to have remained in a state of contraction in October, falling short of forecast to clock in at an unimpressive -18.8%. Indicating that China’s demand for base metals was continuing to recede this weighed heavily on both commodity prices and the South African Rand itself. As a result the impact of more positive domestic Manufacturing Production numbers has been minimal, with gold and platinum values in decline. In consequence, the GBP/ZAR exchange rate has been on a strong uptrend so far this week, reaching a multi-year best of 21.7402 in spite of sentiment towards Sterling remaining relatively soft.
Upcoming Mining Production figures are unlikely to offer any particular support for the ailing Rand, particularly if the case for a December Fed rate move continues to strengthen on the week’s fresh US data. The GBP/ZAR currency pair could also extend gains further as a result of Wednesday’s raft of UK employment data, with traders anticipating an uptick in Average Weekly Earnings alongside a good decline in the number of new claims for unemployment benefit.
Heads Up
Summary of major upcoming data releases that we think may move the market.