As the South African Rand enjoyed some support from the latest raft of domestic production data, the GBP ZAR exchange rate weaken once again. Investors were encouraged to find that manufacturing production had strengthened further on the year in June, rising from 3.9% to 4.5%. This seemed to point towards some recovery within the domestic economy, particularly as mining production was found to have shown a more limited contraction on the year.
Confidence in the Rand was also encouraged by the news that the African National Congress (ANC) had suffered a major electoral setback. Municipal elections saw South Africa’s ruling party lose control of a number of major cities, including Pretoria and Johannesburg. This push back against the once unassailable ANC encouraged demand for the Rand, with markets hoping increased political competition would offer support to the flagging economy.
The Pound faced fresh weakness, on the other hand, thanks to a softer NIESR GDP estimate for the three months to July. Markets had anticipated a slowing in growth, although that did not prevent a bearish reaction when the economy was indicated to have weakened from 0.6% to just 0.3%. This seemed to suggest that the negative impact of the Brexit vote has significantly dragged on the economy, prompting the GBP ZAR exchange rate to trend lower.
This downtrend was extended on Thursday in response to a similarly discouraging RICS House Price Balance for July, which slumped from 15% to 5%. While unsurprising, given the dovish message of estate agents and property funds in recent weeks, this nevertheless encouraged investors to continue selling out of Sterling. With the outlook of the UK economy seeming less than bright the GBP ZAR exchange rate fell to a weekly low of 17.2011.
Risk Appetite and Brexit Worries Pushed GBP ZAR to 2-Year Low
Friday saw a particularly disappointing raft of Chinese data that ultimately failed to weigh on the appeal of the higher-risk Rand, thanks to further weakness in the US Dollar. Markets were encouraged to dial back on expectations for the Federal Reserve to raise interest rates in the near future after the latest US retail sales and consumer confidence measures fell short of forecast. As a result the appeal of the Rand improved, with the South African economy set to benefit from the Fed delaying its return to monetary tightening.
Investor optimism was boosted by the news that South Africa had reclaimed its place as Africa’s largest economy, prompting the Rand to extend its gains further on Monday. As base metal prices also continued to rally at the start of the week this helped push the GBP ZAR exchange rate to a fresh two-year low of 17.0727, despite ongoing worries over political uncertainty within South Africa.
Sterling soon experienced a strong rally in response to July’s raft of UK inflation data, however, despite the measures proving somewhat mixed. The baseline Consumer Price Index was found to have risen further than forecast in the wake of the Brexit vote to climb to 0.6%, although this was contrasted by an unanticipated dip in the core measure from 1.4% to 1.3%. Although there are still concerns that rapidly rising inflation could damage the UK economy and put renewed pressure on wages, the GBP ZAR exchange rate nevertheless trended higher in response.
Rand Forecast to Weaken on Poor South African Retail Sales
Further volatility is likely for the Pound in response to Wednesday’s domestic employment data, although the majority of the figures will relate to the pre-referendum period and are thus of more limited impact. Even so, signs of stronger wage growth could encourage investors to continue favouring Sterling, as it would indicate that the economy was in a stronger position going into the Brexit vote. Any weakness, on the other hand, could well exacerbate the downside pressures building on the Pound, increasing market worries over the health of the UK economy.
Hopes are not all that high for June’s South African Retail Sales, however, which are expected to show that consumer spending slowed on both the month and the year. A weaker showing here would reverse some of the Rand’s recent confidence, offering a reminder of the struggles still facing the domestic economy. As a result the GBP ZAR exchange rate could find a fresh rallying point.