Economic data suggested the UK economy had quickly recovered from the shock of the Brexit referendum outcome, allowing the GBP ZAR exchange rate to trend between 18.8747 and 19.5386.
Buoyant UK Economy Strengthens Pound Sterling as Markit PMIs Outperform Expectations
Pound Sterling made strong gains over the past few days after a series of bullish results from the latest Markit PMIs. Thursday kicked off the appreciation when the manufacturing index unexpectedly leapt into growth territory. Predicted to edge higher from 48.3 to 49, the PMI instead clocked in at 53.3. The GBP ZAR exchange rate bounded up to 19.5354 as a result.
The construction PMI on Friday furthered the advance after performing in a similar manner. The index did remain in contraction thanks to a score of 49.2, but this was still significantly better than the recovery from 45.9 to 46.5 expected.
Following these two results, markets were eagerly awaiting yesterday’s key services PMI. The index did not disappoint, unexpectedly climbing into growth territory with a score of 52.9 instead of rising to the neutral 50 mark from the previous reading of 47.4. The composite index also performed much better-than-expected, printing at 53.6 instead of 50.8.
Political Tensions Continue to Weaken South African Rand as Gordhan Investigation Progresses
The South African Rand has been weakened over the past few days by the continuing saga surrounding Finance Minister Pravin Gordhan. Rumours that Gordhan was due to be arrested sparked a rout on the Rand and, while they were strenuously denied, Gordhan has since been involved in a police investigation. Gordhan is facing potential espionage charges over a unit that he set up in during his tenure as head of the South African Revenue Service which was tasked with spying on politicians.
This has caused considerable consternation among investors. Gordhan was reappointed as Finance Minister in a desperate attempt by President Jacob Zuma to smooth over a political crisis he created after unexpectedly firing respected previous minister Nhlanhla Nene, only to replace him with the unknown David van Rooyen. Many believed this was due to Nene’s attempts to curb the President’s lavish spending and bring the budget under control; van Rooyan was considered to be a ‘yes man’ for Zuma. Political and investor backlash caused Zuma to fire van Rooyan just a few days later, reinstating Gordhan.
However, since then tensions between the President and his new Finance Minister have grown; Gordhan needs to control public finances to protect South Africa’s credit rating, but Zuma is resistant to measures that will curb his spending.
Thursday saw appetite for the Rand weakened thanks to a surprise contraction in the South African manufacturing sector. The Barclays manufacturing PMI had been forecast to ease from 52.5 to 51.9, but instead dropped to 46.3.
South African Rand Bullish as Economy Avoids Recession with 3.3% Q2 Growth
A timely rebound in output from the factory and mining sectors helped the South African economy avoid its second recession since the financial crisis. A further contraction after the first quarter’s -1.2% decline would have left South Africa in a technical recession, but instead the economy grew 3.3%, well above the 2.6% median forecast from a Bloomberg poll of 19 economists. Year-on-year expansion clocked in at 0.6%.
The news has caused the South African Rand to appreciate bullishly, erasing nearly a week’s worth of losses.
Sparse economic data from the UK has given the Pound little strength to resist the Rand today. British Retail Consortium (BRC) figures have shown a surprise decline in sales during August. Predicted to accelerate year-on-year from 1.1% to 1.4%, sales instead dropped -0.9%. This has not overly unsettled the Pound, however, as the decline has been blamed on the Olympics rather than any uncertainty from the UK’s vote to leave the European Union.
GBP ZAR Forecast; Production Data could Firm UK Economic Picture, Weaken South African Outlook
UK industrial and manufacturing data is expected to show an uptick in production in July, which would further lessen fears that the Brexit referendum has shocked the UK economy. Investors could get more of an insight into the likely path of UK monetary policy as well, due to scheduled speeches from the Bank of England’s Jon Cunliffe, Mark Carney, Kristen Forbes and Ian McCafferty. Also out is the NIESR GDP estimate for August.
On Thursday the RICS house price balance is predicted to weaken even further and show a net balance of just 2% of surveyors expecting house prices to continue increasing. Trade balance figures on Friday will give an improved picture of the UK’s negotiating position as talk over the shape of future trade deals outside of the EU increases.
South Africa is set to release production figures for July on Thursday. With a strong rebound having helped GDP in the second quarter, markets will be hoping for firm results to continue the economic strength going forwards. Gold and mining production were both in decline during June, however, printing at -2.6% and -2.5% respectively. Manufacturing production is forecast to weaken on the month and the year. Overall the data could sap momentum from the South African Rand due to a worsening Q3 outlook.