A worsening outlook for the UK economy wasn’t enough to weaken the Pound Sterling to South African Rand (GBP/ZAR) exchange rate last week as the threat of a downgrade to South Africa’s credit rating kept the Rand on a downtrend.
Disappointing UK PMIs Weaken Economic Outlook, GBP/ZAR Defiant
Despite a raft of PMIs suggesting that UK economic output drastically slowed during April, the GBP/ZAR exchange rate managed to strengthen throughout the course of the week, rising from opening levels of 20.7664 to hit a weekly high of 21.8975 on Thursday.
First up was the manufacturing index on Tuesday, which shocked investors by printing at 49.4, pointing to an unexpected contraction in activity. The index had been expected to print at 51.2. Wednesday’s construction industry PMI also underperformed, dropping from 54.2 to 52, -2 points lower-than-predicted.
By the time Thursday’s indexes were released, investors had braced themselves for the bad news. As a result, the Pound managed to remain strong against the Rand despite the UK services PMI dropping from 53.7 to 52.3 and the composite index slumping from 53.6 to 51.9.
South African Rand Firms after IMF Predicts Recovery in 2017
The South African Rand, meanwhile, failed to strengthen on Tuesday despite the Barclays Manufacturing PMI rising from 50.5 to 54.9 and showing strong growth in April. The index had been forecast to slip into contraction territory with a reading of 49.
Anticipation of an imminent downgrade to South Africa’s credit rating kept Rand strength muted. Eventually, Moody’s reaffirmed the current rating, but also gave the country a negative outlook, weakening sentiment.
News at the close of the week softened GBP/ZAR gains going into the weekend, after the International Monetary Fund (IMF) predicted that the South African economy could return to recovery during 2017. The positive sentiment was undermined slightly by the IMF’s warning that further economic shocks could be on their way.
‘A muted recovery is envisaged from 2017. Risks to this outlook are tilted to the downside and include further shocks from China, heightened global financial volatility, and sovereign debt credit rating downgrades,’ the leader of the IMF mission to South Africa, Laura Papi, stated.
GBP/ZAR Forecast: Mining Data could Spark Rand Volatility on Thursday
Tomorrow’s UK trade balance figures could create movement for GBP/ZAR, with a reduction in the deficit predicted. Any gains here could be quickly lost on Wednesday, however, by the release of industrial and manufacturing production statistics, as well as the NIESR UK GDP estimate. Considering the performance of recent PMIs, it’s unlikely these figures will be positive.
On Thursday, the Bank of England (BoE) makes its next interest rate decision. No change in monetary policy is forecast, although ‘Super Thursday’ also brings with it the latest inflation report. Investors will likely be looking in particular for any comments which allude to the impact of referendum uncertainty upon the UK economy.
The South African data calendar is empty for the majority of this week, with the only economic releases falling on Thursday. As a commodity-correlated currency, the Rand will be particularly responsive to the latest domestic mining, gold and manufacturing production ecostats. Year-on-year (YoY) mining production is expected to see an accelerated decline of 12.8%, after a previous drop of 8.7%, while YoY manufacturing is predicted to slide -1.1% after last month’s 1.9% gain.
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Summary of major upcoming data releases that we think may move the market.