Foreign Currency Market Update – GBP / ZAR Update
A significant rise in geopolitical tensions in the last week initially helped to bolster the Rand as the value of gold and platinum were driven up when a rush of investors piled back into safer assets. Market uncertainty was also somewhat quelled by the release of the Federal Open Market Committee’s (FOMC) October meeting minutes, which signalled that the majority of policymakers were considering a December interest rate hike. Although the prospect of a stronger US Dollar has weighed heavily on commodity-correlated and emerging-market currencies in recent months the Rand benefitted from the relative clarification of the market situation, bolstered further as profit taking drove down the ‘Greenback’.
South African Retail Sales were something of a mid-week disappointment, however, as consumer demand slumped from 4.0% to 2.7% on the year in September. This discouraging result was generally outweighed, though, by the latest domestic Inflation Rate report which showed a continued uptick in local inflationary pressure at 4.7%. As this edged closer towards the South African Reserve Bank’s (SARB) inflation target the Rand remained in higher demand, also benefitting from the relative weakness of the Pound.
Thursday saw the SARB unexpectedly raise interest rates by 0.25% at its last policy meeting ahead of the FOMC’s December rate decision, with policymakers acting pre-emptively in an apparent attempt to soften the impact of a Fed hike. However, as inflation still remains below target in spite of improvement and the local economy continues to struggle, this decision was not received overly warmly.
The chances of a more imminent move on monetary policy from the Bank of England (BoE) remained muted over the last week, as UK Retail Sales were revealed to have declined rather sharply in October and Public Sector Net Borrowing proved more disappointing than forecast. While the deficit narrowed from -8.33 billion to -7.47 billion Pounds, this was rather less encouraging than the predicted result of -5.5 billion, suggesting that the recovery of the domestic economy is moving at a slower pace than pundits would like. As a result the GBP/ZAR exchange rate slipped to a fortnightly low of 21.1735, despite the softer Rand.
Ahead of Wednesday’s Autumn Statement from the UK’s Chancellor of the Exchequer George Osborne, sentiment has remained generally muted towards Sterling, with traders wary of the fresh round of austerity measures likely to be announced. On the other hand, the Rand has been bolstered by the third quarter South African GDP report, as growth rebounded on the quarter to increase from -1.3% to 0.7%. Although yearly growth declined, providing further evidence that the domestic economy is slowing, the Rand has remained dominant over the bearish Pound today.
Towards the end of the week the GBP/ZAR exchange rate could see a more substantial rally, should the latest third quarter UK GDP estimate prove stronger than expected. If economic growth is found to have weakened, however, demand for the Pound is unlikely to pick up, to the continued benefit of the Rand.
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Summary of major upcoming data releases that we think may move the market.