Strong monetary policy loosening from the Bank of England (BoE) and signs of a power shift in South African politics have kept the GBP ZAR exchange rate on a downtrend during the past seven days.
Bank of England Throws the Kitchen Sink at the UK Economy with Strong Post-Brexit Stimulus
The Pound was considerably weakened last Thursday by the latest Bank of England (BoE) meeting on monetary policy, the results of which caused the GBP ZAR exchange rate to drop -3.5% from 18.5649 to 17.9448. Markets had anticipated policy easing and even an extension of QE, but the package of stimulus measures unleashed by the Monetary Policy Committee (MPC) went above and beyond expectations.
As well as the -0.25% interest rate cut to 0.25%, the MPC created a new £100 billion Term Funding Scheme to help banks lend to consumers while lessening the impact of lower rates on profitability. Quantitative easing was restarted; until Thursday the asset purchasing programme had been dormant, with the BoE maintaining and reinvesting the returns from the £375 billion worth of assets previously purchased. An additional £60 billion of assets will now be purchased, taking the total under the programme up to £435 billion. On top of this, the MPC will purchase up to £10 billion in corporate bonds.
Markets are expecting further easing in September, and speculation to this effect has been weighing on the Pound. Bets of further cuts were raised today after BoE policymaker Iain McCafferty wrote in The Times that;
‘If the economy proves to have turned down in line with the initial survey signals, I believe that more easing is likely to be required, but that can easily be delivered in coming months.’
McCafferty’s dovishness is particularly telling, considering that he is one of only two policymakers since the middle of 2011 to have voted in favour of hiking interest rates at some point. He was consistently voting against the rest of the MPC for a rate hike to 0.75% during the six policy meetings between August 2015 and January 2016.
Investors Cheered as South African Elections Curbed Power of Ruling ANC Party
South Africa’s ruling African National Congress (ANC) party suffered a major blow recently after receiving its lowest level of voter support in elections since it gained power in 1994. The ruling party, once led by Nelson Mandela, yielded just 54% of the votes, with the opposition Democratic Alliance (DA) scoring major coups by taking the capital city of Pretoria as well as the symbolic Nelson Mandela Bay area. DA took 26% of the votes; a 4% increase on the 2014 election results.
This has received a mixed reaction. On the one hand, investors have reacted positively to the notion that this may be signalling an end of the ANC’s dominance, with DA leader Mmusi Maimane claiming his party could take power by 2019. ANC President Jacob Zuma has become increasingly unpopular with the electorate and investors due to his questionable spending habits and policy decisions, including spending $20 million in public money on upgrading his private home to include a swimming pool and amphitheatre.
However, the narrowness of the ANC’s electoral margin has raised concerns over the likelihood of the government pushing through with tough economic measures designed to boost the economy. These measures would be highly unpopular and the party clearly cannot afford to take any more hits to its reputation. As BHH analysts commented in a research note;
‘Official election results show that support for the ruling ANC fell below 60 percent for the first time ever. Pushing painful structural reforms probably isn’t the first thing that an unpopular government is going to do. The knee-jerk reaction would more likely be to boost spending and handouts, which would pressure the country’s ratings.’
This concern has yet to overly weaken the Rand, however, although it could rematerialize further down the line.
Pound Slumps against South African Rand as UK Trade and Manufacturing Data Disappoints
Weak pre-Brexit data has upset the Pound today, causing significant losses for the GBP ZAR exchange rate. News that UK industrial production had the strongest quarter since 1999 failed to cheer investors, considering the accompanying poor data. Manufacturing production failed to recover as much as expected, declining by -0.3% on the month after a downwardly revised -0.6% drop in May. On a yearly basis, manufacturing grew 0.9%, a much greater slump from the downwardly revised 1.5% growth than the 1.3% predicted.
The latest trade figures printed poorly as well, with imports hitting a record high of £48.9 billion. The visible trade balance climbed from -£11,526 million to -£12,409 million. Over the last three months, the UK trade deficit with the EU has widened by -£400 million.
While there has been no South African data released today, the South African Rand is continuing the advance started seven days ago, which has continued largely unbroken. The Rand has now reached a one-and-a-quarter-year high against the Pound, after spending the last three quarters of 2015 consistently on a downtrend.
GBP ZAR Exchange Rate Forecast; UK Housing and Construction, SA Election Ramifications to Weigh
Thursday’s house price data could cause some Pound movement, especially considering how dramatically the net number of surveyors predicting a rise in property prices has fallen recently. Having already dropped from 41% for April to 19% for May and now 16%, forecasts are for the July reading to fall to just 6%. This will add weight to the warnings already issued by the property sector that prices are likely to be impacted by the Brexit vote.
On Friday, construction output figures for June could weaken the Pound further if they show the expected acceleration in decline from -1.9% to -2.1%.
The South African Rand is likely to continue responding to the developments following the elections, as investors wait to see how the government will react to its poor results. Data on Thursday may also move ZAR, with gold, mining and manufacturing production data all set for release. An improvement on previous figures is generally forecast overall.