Last Friday South African mining production unexpectedly jumped 15.5% on the year in March, boosting the appeal of the Rand. As there was also a modest uptick in manufacturing production this encouraged hopes that the economy is in an improving state of health in spite of ongoing political jitters. This put some pressure on the GBP ZAR exchange rate, pushing the pairing back from a six-month best.
Demand for the Pound slumped sharply on the back of the Bank of England (BoE) policy meeting and quarterly Inflation Report. Markets were disappointed that only noted hawk Kristin Forbes continued to vote for an immediate interest rate hike, as there had been some speculation that a second hawk would emerge. As Forbes is due to depart the BoE in June, the prospect of tighter monetary policy appears to remain rather distant, in spite of a more optimistic Inflation Report.
While the Bank raised its growth forecasts, this failed to encourage the GBP ZAR exchange rate, given that the corresponding wage growth forecast was revised lower. Of greater concern was the fact that the BoE had based its projections on the assumption that the UK will go through a smooth Brexit process. Given the hard line of rhetoric that Theresa May has adopted the more likely scenario appears to be an acrimonious divorce, suggesting that policymakers are taking an overly optimistic view. Coupled with a raft of disappointing trade and production figures this encouraged further selling of the Pound.
Chinese Infrastructure Plans Boosted Rand Appeal
Market risk appetite picked up sharply on Monday, responding to the announcement of China’s ambitious Belt and Road initiative. Billed as the world’s largest ever infrastructure investment project, this US$900 billion spending plan prompted investors to pile back into commodities and other higher-yielding assets. Although it remains to be seen whether China can follow through on its ambitions the pledge nevertheless helped to shore up the Rand, sending metal prices higher.
The downside pressure on the GBP ZAR exchange rate mounted further on Tuesday as April’s UK inflation data exceeded forecasts. While investors had anticipated a fresh increase in inflationary pressure at this juncture there was still some surprise when the consumer price index rose 2.7% on the year. With inflation rising at a faster pace than anticipated the signs for the UK economy are not overly positive, given the detrimental impact that this will have on wages and consumer spending.
Pound Jitters Expected with UK Wage Data in Focus
Sterling could extend its recent losses further if the latest raft of UK labour market data proves similarly discouraging. Particular interest will be paid to the average earnings figures, with wage growth expected to remain sluggish in comparison to the bullish inflation rate. On the other hand, an uptick in earnings could offer the GBP ZAR exchange rate a rallying point if the tightening employment conditions are found to have encouraged companies to raise wages.
March’s South African retail sales data could prompt renewed weakness for the Rand if consumer spending is found to have weakened on the month. Confidence in the outlook of the economy remains somewhat limited as political worries continue to cast a cloud. With the commodity rally likely to lose momentum as investors are encouraged to engage in profit taking, the GBP ZAR exchange rate could find some support in the short term.