Confidence in the risk-sensitive Rand has been hampered recently by a combination of domestic and global concerns, despite a positive Manufacturing PMI result. Speculation mounted over the course of the week that the Federal Reserve could be encouraged to raise interest rates as soon as November as a result of bullish US data. This weighed heavily on the appeal of the Rand, with base metal prices weakening and market risk appetite slumping in response to the strength of the US Dollar.
Worries also weighed on the appeal of the Pound, though, with the Conservative party conference giving the market little cause for confidence. Investors were somewhat alarmed by the harder line of rhetoric on display from politicians, with Theresa May’s government appearing willing to jettison single market access in favour of tighter migration controls. With the prospect of a hard Brexit looking increasingly likely the GBP ZAR exchange rate struggled to capitalise on the softening of the Rand, remaining largely biased to the downside.
Hard Brexit Fears Weighed Heavily on Pound Sentiment
Although September’s raft of UK PMIs all bettered expectations, pointing towards greater resilience within the domestic economy, this failed to particularly enhance the appeal of the Pound. The bearish mood of markets took a fresh downturn on Friday in the wake of a flash crash during the Asian session. After the Pound lost 6.1% against the US Dollar in a two minute window the currency struggled to recover all of its lost strength, particularly as Brexit worries worsened over the course of the day.
Comments from French President François Hollande and European Commission President Jean-Claude Juncker indicated that the EU will also adopt a hard-line with regards to exit negotiations. The reiteration of the link between single market access and freedom of movement worsened the outlook of investors, with hopes of a more limited divorce fading further.
The GBP ZAR exchange rate saw an even sharper slump in the wake of September’s US Non-Farm Payrolls report, which disappointed expectations. With the headline figure weaker than hoped and the Unemployment Rate rising back to 5.0% the odds of an imminent Fed hike declined markedly, with dovish policymakers unlikely to be swayed by the data. As a result, the Rand rallied strongly to push the GBP ZAR currency pair to a fresh two-year low of 17.04, although a modest rebound soon followed.
Weaker South African Production Data Predicted to Shore up GBP ZAR Rate
A warning from the head of the CBI has kept the Pound under pressure at the start of the new week, encouraging investors to continue selling out of the softened currency. Carolyn Fairbairn cautioned that the UK government’s apparent stance on Brexit risks closing the door on the country’s open economy, something that could prove distinctly harmful. With domestic data fairly limited over the coming week, and the movement of the Pound increasingly divorced from ecostats, the GBP ZAR exchange rate could continue to trend lower.
A raft of South African production data could prompt some Rand weakness over the course of the week, with any signs of weakness within the domestic economy unlikely to encourage investor confidence. If production continued to struggle in August then the GBP ZAR exchange rate may find a rallying point. Given the still tumultuous state of the domestic economy and political scene the Rand may have trouble holding onto a stronger footing, particularly if risk appetite begins to wane.
Friday’s UK construction output results are expected to paint a more positive picture of the UK economy, meanwhile. Following July’s sharp contraction in construction markets would be happy to see an improvement, although the impact of the data could still be limited.