While the news that fraud charges against South African Finance Minister Pravin Gordhan were being dropped offered a strong boost to the Rand, this was ultimately short-lived. Confidence in the outlook of the domestic economy was dented by an unexpectedly weak Manufacturing PMI, which slipped from 48.5 to 45.9 in October. This indicated that the South African economy remains in a less than robust state, despite efforts from Gordhan and the South African Reserve Bank (SARB). As a result the GBP ZAR exchange rate rallied strongly, benefitting in spite of a general increase in market risk appetite.
Article 50 Ruling Boosts GBP ZAR Exchange Rate
The appeal of the Pound increased dramatically on Thursday, however, after the High Court ruled that parliament must be consulted before Article 50 can be triggered. While there is little doubt that MPs would vote to approve the motion, this announcement nevertheless raised hopes of greater parliamentary involvement in the Brexit process. More scrutiny from MPs is expected to limit the government’s harder rhetoric on the matter, potentially resulting in a softer exit from the EU. Naturally this prospect cheered markets, driving the GBP ZAR exchange rate substantially higher.
Sterling was also boosted by the Bank of England’s (BoE) November policy meeting, which proved rather less dovish than anticipated. While investors had dialled back on expectations of another interest rate cut at this juncture there was surprise when the meeting minutes noted that rates could be adjusted either way. This indication of a potential return to monetary tightening encouraged further Pound buying, despite the accompanying Inflation Report indicating that inflationary pressure is likely to spike in 2017.
US Election Outcome to Determine Rand Direction
Wider market sentiment increasingly dominated the outlook of the Rand in the final days of the US presidential election campaign. After the FBI announced that a fresh cache of emails had not altered its earlier decision to clear Hillary Clinton, investor confidence rose dramatically. While the email scandal had damaged Clinton’s polling numbers markets remained optimistic that she could still secure the presidential vote. This confidence improved the appeal of higher-yielding assets, such as the Rand, even as the US Dollar regained some ground.
If markets are proven wrong the GBP ZAR exchange rate is in for some substantial volatility, with a Donald Trump victory set to see a sharp selloff in riskier assets. Trump’s economic and political policies are expected to provoke high levels of unease and disturbance which could damage the global economy. Thus a win for the Republican candidate could weigh heavily on the sensitive Rand, even if such a result would also likely hamper demand for the Pound.
On the other hand, if Clinton does emerge triumphant then any boost to the Rand could prove to be short-lived. A Democrat victory would keep the Federal Reserve on track to raise interest rates before the end of the year, with the stronger US Dollar set to put renewed downside pressure on ZAR exchange rates. But with this eventuality largely priced in, the GBP ZAR pairing may struggle to hold onto any resultant gains for long.
Further developments within the Brexit debate could limit the upward momentum of the Pound over coming days, given that the government has shown every intention of pressing ahead with its agenda. While it will be some weeks before the Supreme Court offers its ruling on the Article 50 question, the prospect of a harder Brexit is likely to remain on the minds of investors. If the UK trade balance and construction output data do not point towards greater economic resilience then the GBP ZAR exchange rate could return to a downtrend.