Foreign Currency Market Update – GBP / ZAR Update
With emerging markets struggling against a China-led slowdown and bearish commodities, the South African Rand has fared poorly versus its currency rivals of late. Even significant Euro gains weren’t enough to accelerate demand for the Rand. With particular reference to precious metals, with the exception of gold, weak commodity prices are having a significantly detrimental impact on South Africa’s trade balance. What’s more, the increased prospect of a Federal Reserve rate hike on December 16th has compounded headwinds.
Over the past week, the Pound Sterling to South African Rand (GBP/ZAR) exchange rate was trending within the range of 21.3817 to 22.0426.
On Wednesday the GBP/ZAR conversion rate rose to an all-time record high despite a complete absence of British economic data to provoke volatility. The British asset gained versus all but the Euro as traders looked ahead to tomorrow’s Bank of England (BoE) interest rate decision. Whilst policymakers are not expected to alter the state of play at this time, the corresponding meeting minutes are projected to be more hawkish than November’s document. The GBP/ZAR record-high trading weight is mostly the result of Rand weakness rather than Sterling strength.
The Rand’s downtrend was accelerated at the tail-end of last week after Standard and Poor’s downgraded South Africa’s economic outlook to negative. Adding to headwinds was low commodity prices with the huge drop in crude oil prices weighing on equities markets. Precious metals were hit hard as mining industries across the globe continue to feel the pinch. South Africa’s precious metal mining industry is a key driver of growth which can account for S&P’s decision. Another difficulty facing South Africa is the widening of the current account shortfall as fiscal deficits show that the emerging market economy is in a troubled state.
On Wednesday the Rand depreciation accelerated even further after inflation data showed price pressures were rising despite economic growth dragging. This leaves the South African Reserve Bank (SARB) few options to reduce price pressures with monetary policy. Even though inflation is rising slowly and remains within the bank’s 3-6% target, inflationary risks remain pinned to the upside with bearish commodities acting like an unwanted tax cut. The GBP/ZAR exchange rate advanced by around 0.4% during Wednesday’s European session.
Looking ahead, there are several signs which indicate that the South African Rand is likely to extend record-losses versus its major peers: China’s rising inflation reduced the chances of additional stimulus from the People’s Bank of China (PBoC), the commodities rout is showing no sign of let up, South African growth struggles whilst inflation rises, and the Federal Reserve are all-but-guaranteed to hike the benchmark interest rate next week. In terms of the GBP/ZAR conversion rate the Pound could extend record gains versus the Rand if the Bank of England Monetary Policy Committee (MPC) sees more than one dissenter in its vote on interest rates.
The Pound Sterling to South African Rand (GBP/ZAR) exchange rate was trending at a record-high 22.0420 during Wednesday’s European session.
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