The UK’s visible trade deficit narrowed by more-than-anticipated in December, prompting the Pound Sterling to South African Rand exchange rate to climb to a weekly best of 23.3712 last Tuesday. The slightly stronger figure was of some reassurance to Chancellor of the Exchequer George Osborne, who potentially faces a difficult task in achieving the measures set out in his Autumn Statement.
Confidence in the strength of the domestic economy flagged, however, in response to unexpectedly poor UK Industrial Production figures on Wednesday. Overall industrial output, as well as the manufacturing subset, contracted on both the month and the year in December, suggesting a strong decline in demand. This proved substantially disappointing to investors who had been anticipating a more robust acceleration in industrial production of 1.0% on the year. The results were indicative of the impact negative global headwinds are having on the UK economy.
This less optimistic outlook was confirmed by the latest NIESR GDP estimate, which predicted lower growth of 0.4% compared to previous estimates of 0.6%. A weakening manufacturing sector is now expected to weigh heavily on economic growth in the near future and further discourage hopes that the Bank of England (BoE) might be prompted to raise interest rates sooner rather than later. In response economists have been inclined to dial back their own forecasts for the expected take-off for UK interest rates, with some predicting that monetary tightening will not come until 2020.
Rand Shored up as Gold Hit One-Year High
Despite the absence of trading on the often volatile Shanghai Composite Index last week – the result of the Lunar New Year celebrations – markets remained in more bearish shape. While commodity-correlated, higher-risk currencies were pressured, demand for safe-haven gold rose sharply. As a result the price of gold climbed to a yearly high, helping to shore up the Rand in spite of negative market sentiment.
While gold production declined sharply on the year in December, South African Mining and Manufacturing Production figures showed that the domestic economy improved somewhat at the end of 2015. Nevertheless, the Rand soon returned to a more dovish trend as President Zuma delivered his latest State of the Nation speech. With extreme drought conditions and increasing social unrest, the ultimate outlook of the South African economy is rather less optimistic than might be hoped.
Fresh Stock Market Rally Boosts Rand
A more sustained rally of global stock markets saw the Rand recover some of its lost strength on Monday, as pledges of more accommodative monetary policy measures from the Bank of Japan (BoJ) and European Central Bank (ECB) bolstered investor confidence. However, a modest uptick of 0.3% in baseline UK inflation has since seen the GBP/ZAR exchange rate return to somewhat stronger form.
Ahead of this week’s summit of European leaders the issue of the UK’s future within the European Union is likely to weigh more heavily on the Pound, however, as Prime Minister David Cameron hopes to secure backing for proposed reforms. Should Cameron achieve this the UK will be set for a June referendum, although there still remains potential for a more substantial delay if some leaders remain opposed to the current draft.
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