Friday 24th of June saw the announcement of the UK’s historic decision to leave the European Union. The ensuing market chaos has seen GBP ZAR plummet to a ten-month low, although turbulent stocks and commodity markets have weakened the South African Rand as well.
GBP Crashes Following Historic EU Referendum Decision
The vote to leave the European Union on Friday stunned the markets, who had been expecting a win from the ‘Remain’ camp. Market confidence had been so strong that the Pound, global stocks and risky assets had all appreciated in the run up to the vote. The announcement for the final result quickly reversed that trend.
Over the course of Friday, the GBP/ZAR exchange rate collapsed, falling -6.5% as investors deserted the UK currency. Several days of messy politics have followed, further increasing the global uncertainty and keeping both the Pound and risk-correlated assets weak. David Cameron resigned as Prime Minister, throwing doubt over who would lead the UK’s exit negotiations and when exactly Article 50 would be triggered. There was even talk of a second referendum, with a petition for one nearing 4 million signatures (although a not insignificant amount were added by spam bots) and multiple politicians calling for the government to reject the referendum result.
George Osborne failed to particularly reassure the frantic markets with his comments that the UK was strong enough to survive a ‘Brexit’, while Bank of England (BoE) Governor Mark Carney had a more positive effect when he promised the Bank would provide additional liquidity to the markets.
The Pound has somewhat recovered today against most of the major currencies, although it is still slumping against the South African Rand. Many analysts believe the recovery is simply a bounce. GBP has hit a level of technical resistance and is appreciating as traders take advantage of its low trade weighting. Many commentators believe that ‘Brexit’ fears will return to the markets shortly. Particularly likely to weigh on the Pound in the coming days are Angela Merkel’s comments that the UK will not be able to access the single market unless it accepts free movement.
ZAR Bullish after ‘Brexit’ Vote as Foreign Shareholders Race for Gold Havens
Like all the majors, the South African Rand saw considerable appreciation against Pound Sterling in the wake of the referendum results. This strength was not universal; as a commodity asset, the Rand suffered from risk-aversion and so weakened against safer assets such as the US Dollar.
However, as one of the world’s leading gold producers, South Africa saw something of a contradictory influx of investment into shares following the announcement of a vote for ‘Brexit’. Gold is considered one of the safest assets, with spot prices climbing 5.5% in three days to hit US$1,324.60 – a near two-year high. As a result, South African shares were the exception to the rule, given the market aversion to risk. On Friday alone, foreign investors bought R4.22 billion (£206 million) worth of South African stocks, which was the fastest pace in seven years and pushed weekly investment inflow up to a 7-year high of R14.5 billion (£700 million).
GBP/ZAR Forecast: ‘Brexit’ in Control of Market Sentiment
Both the UK and South Africa are set to release data during the coming days, but it is unlikely to have much of an impact given the condition of the markets. With so many questions hanging over the UK, such as when Article 50 will be triggered and who will lead the negotiations, there will be plenty of rumours, speculation and news to keep the Pound weak. Market sentiment is likely to dictate currency movement in the short-term, so it could be some time before data-driven movement becomes the norm again.
Because a ‘Brexit’ is likely to have adverse economic effects, UK data in particular could be ignored. Thursday’s GfK Consumer Confidence survey results and finalised Gross Domestic Product figures, for instance, document a pre-‘Brexit’ UK. With everything subject to change, the figures they show could be seen as somewhat redundant.
South African data has a better chance of moving the domestic currency, with Thursday’s trade balance and Friday’s manufacturing PMI and consumer confidence of particular note.