Turmoil dominated the outlook of the Rand as South Africa’s credit rating was downgraded to junk by Standard & Poor’s. This move came as a result of President Jacob Zuma’s decision to fire his experienced finance minister in a major cabinet reshuffle, raising concerns over the future health of the economy. Although the Standard Bank PMI showed a modest uptick on the month in March this was not enough to halt the slide of the Rand.
After coming under pressure as a result of weaker-than-expected manufacturing and construction PMIs the Pound was prompted to rally in response to a bullish services PMI. As the service sector is the primary driving force of the UK economy, the news that it continues to grow at a solid pace boosted the appeal of Sterling. This raised hopes that the negative impact of Brexit-based uncertainty has remained limited, encouraging markets to favour GBP exchange rates as they continue to await the start of formal exit talks.
ZAR Downtrend Extended by Hawkish Fed Outlook
The general mood of risk appetite weakened further ahead of the weekend in the wake of unexpectedly hawkish Federal Reserve meeting minutes. With the US central bank looking set to pursue a faster pace of monetary tightening demand for the risk-sensitive Rand remained limited. While March’s US payrolls report put something of a dampener on speculation that the Fed could hike interest rates sooner rather than later, the Rand struggled to capitalise on this shift. News that Fitch had also downgraded South African credit to a junk rating prompted further Rand jitters.
However, the sharp decline of the Rand ultimately encouraged investors to buy back into the weakened currency, which was considered to have become undervalued. This limited the strength of the GBP ZAR exchange rate at the start of the new week, even though an atmosphere of political uncertainty remains. If protests continue and pressure on President Zuma mounts further, though, the Rand could maintain a predominantly bearish outlook.
Increasing Squeeze on UK Consumers to Weigh on GBP ZAR
Although the UK consumer price index showed that inflation held steady at 2.3% on the year in March this was not enough to shore up the Pound on Tuesday. Investors were disappointed that inflationary pressure had not mounted further, with the Bank of England (BoE) still expected to maintain its neutral outlook for the foreseeable future. With the squeeze on consumers likely to worsen over the coming months, confidence in the resilience of the domestic economy equally weakened.
The GBP ZAR exchange rate could come under additional pressure if the latest weekly earnings figures prove discouraging. When coupled with the strong level of domestic inflation any weakening in wage growth would signal that household earnings are likely to be further eroded. As much of the recent resilience of the UK economy has been attributable to high levels of consumer spending a poor showing here could increase the risk of a material slowdown.
A fresh contraction in South African retail sales could also dent the appeal of the Rand. If the domestic data continues to demonstrate signs of weakness, the mood of investors is likely to sour once again. With the departure of much-respected former finance minister Pravin Gordhan, markets are sceptical that the economy will see a significant turnaround any time soon. Even so, expectations are solid for the latest mining production figures.