The appeal of higher-risk currencies like the Rand has been diminished by the continuing hawkishness of members of the Federal Open Market Committee (FOMC), with markets prompted to price in higher odds of an imminent US interest rate hike. However, in spite of strong suggestions from policymakers, the decidedly mixed nature of recent US data has left investors somewhat sceptical about the possibility of a June rate rise.
A modest decline in the South African Producer Price Index offered some support to the Rand on Thursday, encouraging hopes that domestic inflation could be easing somewhat. Prices dipped from 7.1% to 7.0% on the year in April, in a sign that the South African Reserve Bank’s (SARB) recent easing measures are having a positive impact on the economy. Consequently the GBP/ZAR exchange rate began to weaken, moving off a weekly high of 23.1372 as risk appetite widely improved.
Persistent ‘Brexit’ Uncertainty Weighs on GBP/ZAR Exchange Rate
Although the Pound was on a bullish run across the board earlier in the week, the volatile currency was unable to maintain this optimistic outlook for long. Profit taking helped to drive Sterling lower on Thursday, with investors discouraged by the second estimate of the UK’s first quarter GDP. Annual growth was revised down from 2.1% to 2.0% as larger-than-expected contractions were revealed throughout the domestic economy. This seemed to suggest that referendum uncertainty had dragged on growth more severely than previously thought, sharply reducing the appeal of the Pound.
However, ahead of the weekend the GBP/ZAR exchange rate recovered some ground thanks to an unexpectedly improved UK GfK Consumer Confidence Survey. The appeal of the Rand was also dented by hawkish comments from Fed Chair Janet Yellen, who gave further support to the idea of a June or July rate hike. This prompted a fresh surge in demand for the US Dollar, increasing pressure on risk-sensitive currencies and pushing gold prices lower for a ninth consecutive session.
Confidence in Pound Sterling weakened further at the start of the week, thanks to a number of polls indicating a stronger level of support for the ‘Leave’ campaign. Notably the latest ICM telephone poll showed a 45%-42% split in favour of a ‘Brexit’, a result which raised particular concern amongst investors as phone polls are typically regarded as more accurate than those taken online. Referendum uncertainty was seen to sharply increase in response, prompting the GBP/ZAR exchange rate to decline from its fortnightly best of 23.1961.
Fed Hike Speculation Predicted to Extend ZAR Volatility
Despite South African Manufacturing PMI disappointing expectations in May this was not enough to particularly weaken the Rand on Wednesday. The index slipped from 54.9 to 51.9 on the month, pointing towards continued weakness within the South African economy. Nevertheless, the discouraging nature of recent US data prompted a decline in Fed hike bets, boosting the risk-sensitive Rand as market sentiment improved. Consequently the GBP/ZAR currency pair plunged to a fresh low of 22.5876.
While the latest UK Manufacturing PMI bettered expectations this failed to shore up the GBP/ZAR exchange rate, as ‘Brexit’ worries continued to overshadow the outlook of the domestic economy. Should the upcoming Construction and Services PMIs also point towards improvement in growth, however, the Pound could yet return to stronger form against rivals. Weaker showings or any further increase in ‘Brexit’ worries, on the other hand, are likely to keep the appeal of Sterling limited.
Demand for the Rand could continue to improve over the coming days if US data remains unsupportive of a near-term Fed rate hike, with a weaker Non-Farm Payrolls report likely to end talk of a June move and lead to a marked increase in risk appetite. While wider market sentiment may remain generally supportive, however, the Rand could come under renewed pressure if Friday sees Standard & Poor’s downgrade its credit rating for the South African economy to junk status. Expectations are not overly optimistic, with any lowering of the country’s credit rating likely to give the GBP/ZAR exchange rate a strong boost.
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Summary of major upcoming data releases that we think may move the market.