Pound Sterling has been able to make a strong recovery over the past seven days on referendum hopes, with little South African data to support any Rand resistance.
Pound Sterling (GBP) Strengthens as ‘Brexit’ Fears Ease
As the odds of the UK voting in favour of a ‘Brexit’ dwindle, investors have returned to Pound Sterling, believing that referendum uncertainty had been too highly priced-in to the UK unit. The resulting demand has sent the Pound rallying over the past seven days, with GBP/ZAR gaining 3.5%.
Two ‘Brexit’ polls provided support for Britain Stronger in Europe, with one showing a rise in support for the ‘Remain’ side while the other revealed that an increase in expected voter turnout for supporters of the EU. US President Barack Obama also entered the debate, urging the UK ‘as a friend’ to vote in favour of remaining a part of the EU.
Economic data was less positive, with retail sales slowing and final government borrowing for the 2015-16 fiscal year overshooting forecasts by nearly £2 billion. Today’s Gross Domestic Product figures for the first quarter of the year showed the expected slowdown in growth, with quarter-on-quarter (QoQ) expansion dropping from 0.6% to 0.4%.
Regardless, the Pound is still on a strengthening bias virtually across the board.
Threat of Credit Rating Downgrade Weakens South African Rand (ZAR)
The South African Rand has steadily declined against the Pound over the past week. An almost empty docket gave the Rand little economic data from which to draw strength. Concerns over South Africa’s credit rating grew, with Moody’s, Standard & Poor’s and Fitch all rating the country just above ‘junk’ status and Moody’s in the process of reassessing its rating.
Arguments over South Africa’s state-owned enterprises have weakened the Rand today. Many of the businesses have required bailouts and state support, prompting the opposition to call for these to be privatised in order to alleviate the financial strain on the state. However, Public Enterprises Minister Lynne Brown has defended the companies, claiming:
‘We must maintain the ownership of these SOEs, given their size and contribution to our economy. This will be done with private sector participation. They are key and strategic assets that we need to keep intact and continue to grow in order to guarantee the future of our children and create viable, sustainable and dependable future employers to reverse the current economic cycle.’
GBP/ZAR Forecast: Busy SA Data Calendar could Keep Exchange Rates Volatile
The next seven days hold plenty of data for South Africa, suggesting volatile trading for the Pound to South African Rand exchange rate. Thursday’s producer price index figures are expected to show a slight slowdown in growth. Data on Friday may show a rise in private sector credit and a widening of the trade deficit for March if forecasts are correct. Monday’s Barclays Manufacturing PMI for April is expected to show that sector activity declined after marginal growth in March.
For the UK, ‘Brexit’ speculation is likely to influence the Pound, especially considering the ‘Leave’ campaign will have had more than a week to plan their riposte to the latest developments supporting the ‘Remain’ side.
Speeches from George Osborne and Deputy Governor of the Bank of England, Ben Cunliffe, could provide some impetus to GBP/ZAR. UK manufacturing and construction PMIs are both expected to show a small increase in activity, which would be Pound-supportive.
Heads Up
Summary of major upcoming data releases that we think may move the market.