Pundits were not particularly surprised when the South African Reserve Bank (SARB) chose to raise interest rates last Thursday in an attempt to counter the recent weakness of the Rand and bolster the ailing strength of the domestic economy. Inflationary pressure within South Africa has continued to run near the higher end of the SARB’s target range, which in turn has been exacerbating other downside pressures that have been plaguing the nation. Consequently this helped to improve sentiment towards the Rand as investor confidence rose.
Demand for the risk-sensitive Rand was boosted further on Friday after the Bank of Japan (BoJ) unexpectedly decided to slash interest rates into negative territory in a bid to encourage greater levels of lending. Severely denting the safe-haven Yen, this prompted a general move towards higher-yielding assets, with global stock markets rallying strongly in response to the move. Commodities were equally trading higher on the back of rumours that Russia and the Organisation of the Petroleum Exporting Countries (OPEC) were considering means of curbing oil production. While this speculation was later quashed by Saudi officials, the Pound Sterling to South African Rand exchange rate nevertheless continued to trend lower ahead of the weekend.
Widening South African Trade Balance Bolstered Rand
The outlook of the South African economy appeared at least a little brighter following the revelation that the nation’s trade surplus had widened by considerably more than forecast. Clocking in at 8.22 billion rather than 4.85 billion Rand, this suggested that the domestic economy was in a somewhat stronger state than previously thought, likely shored up by recovering base metal prices. This stronger showing was equally in contrast to the marked turmoil triggered by the country’s quick succession of finance ministers in early December, a further endorsement to the acumen of the incumbent Pravin Gordhan.
Friday’s sharp weakening of the GBP/ZAR exchange rate was swiftly reserved after the weekend, however, as disappointing Chinese manufacturing data saw markets return to a state of risk aversion. China’s sixth consecutive month of manufacturing contraction reignited concerns over the health of the global economy, with slowdown fears weighing heavily on the higher-risk Rand. This bearishness deepened after South African Manufacturing PMI equally fell short of expectations, with the pace of sector growth slowing in January from 45.5 to 43.5. As UK manufacturing bettered forecasts, by contrast, the Pound rapidly extended its gains over the softened Rand.
Rand Dives as World Bank Warns of Potential South African Recession
Optimism declined further on Tuesday when the World Bank substantially lowered its growth forecast for South Africa, cutting its estimate from 1.4% to 0.8% and commenting that the local economy could be at risk of recession. Serious drought conditions within South Africa have helped to hamper growth in the economy, with weakening base metal prices, a strengthening US Dollar and the Chinese slowdown equally contributing to this less positive assessment. As a result there has been little fresh incentive to buy into the Rand so far this week.
Nevertheless, the GBP/ZAR currency pair may cede back its recent gains later in the week as the Bank of England meets to discuss monetary policy and release its latest inflation report. As policymakers are expected to take a more dovish view, considering continued global volatility and disappointing UK wage growth, the Rand could stand to benefit from a weakened Pound.
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Summary of major upcoming data releases that we think may move the market.