Ahead of the weekend the GBP/ZAR exchange rate was shored up by a better-than-expected UK Services PMI, which rose from 52.3 to 53.5 in May. As the service sector accounts for the single largest portion of the UK’s economic activity, this stronger showing overshadowed the impact of a more disappointing Construction PMI. Investors were reassured to see that ‘Brexit’ fears had not overly dragged on domestic growth in May, also easing worries of a greater underlying weakness in the economy.
Demand for higher-risk currencies was strongly boosted on Friday, however, as the US Non-Farm Payrolls report proved far weaker than investors had anticipated. This led to a sharp drop in the odds of a June interest rate hike from the Fed, undoing the impact of earlier hawkish policymaker commentary and softening the US Dollar. Consequently commodity prices rallied markedly, with gold returning to a more bullish trend as the appeal of the ‘Greenback’ declined. With the Rand shored up, the GBP/ZAR currency pair weakened to a fresh low of 21.8915.
The Rand was offered further support when it was revealed that S&P had left South Africa’s credit rating unchanged, eliminating fears of an imminent downgrade to junk status. This reprieve is likely to be temporary given that the agency also maintained its negative outlook on the economy, with political turmoil and worsening economic conditions remaining a prominent concern. However, for the time being, at least, confidence was boosted enough to add further downside pressure to the GBP/ZAR exchange rate.
‘Brexit’ Worries Weighed on GBP/ZAR
At the start of the week this downtrend was extended by the latest round of EU referendum polls, which indicated increased support for the ‘Leave’ campaign. This apparent swing in voter support prompted investors to sell out of the Pound on Monday, pushing the currency lower across the board as the odds of a ‘Brexit’ seemed to increase. With little in the way of domestic data to counteract this renewed bout of referendum-based volatility, the GBP/ZAR exchange rate slipped to a four-week low of 21.4985.
While dovish commentary from Fed Chair Janet Yellen saw a June interest rate hike taken off the table, this was not enough to keep the Rand on a stronger footing for long. Markets were somewhat discouraged by the fact that South Africa’s foreign exchange reserves had declined further than anticipated in May. With confidence in the domestic economy still limited this undermined the appeal of the Rand on Tuesday morning.
Weaker South African GDP Predicted to Dent Rand
Investors are likely to continue to move away from the Rand in response to the first quarter South African GDP data. Economic growth is forecast to have weakened at the start of the year as domestic conditions deteriorated, with GDP expected to slow from 0.4% to just 0.1% on the quarter. Given the caution expressed by S&P signs of continued slowness within the local economy are expected to weigh heavily on the Rand.
‘Brexit’ speculation is likely to remain the predominant influence on the Pound as the date of the referendum draws closer, particularly if polls continue to demonstrate ‘Leave’ campaign gains. However, if there are any indications that the UK is more likely to vote to remain within the EU confidence in Sterling could improve more substantially. Nevertheless, volatility is likely to be pronounced in coming weeks.
Poor UK Industrial and Manufacturing Production figures could weaken the GBP/ZAR exchange rate further, with evidence of a greater slowdown unlikely to promote market optimism. Also of note will be the NIESR GDP estimate for May, which could point towards a continued weakening in growth. Weaker domestic data is likely to reduce the odds of the Bank of England (BoE) adopting a more hawkish outlook on policy in the near future, reducing the appeal of the Pound even in the event of a vote to remain in the EU.
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Summary of major upcoming data releases that we think may move the market.