South Africa’s trade surplus was found to have narrowed further than forecast in April, prompting investors to sell out of the Rand on Wednesday. Although the country maintained a solid surplus of 5.1 billion this was not enough to ease market worries over the future of the domestic economy. As a result, with market risk appetite already limited the GBP ZAR exchange rate was encouraged to rally strongly.
However, while the South African unemployment rate also picked up sharply in the first quarter this was not enough to keep the Rand under pressure. Even though the domestic labour market continues to demonstrate signs of loosening the higher-yielding currency was able to recover some of its lost ground ahead of the weekend.
While both the UK manufacturing and construction PMIs bettered expectations in May this was not enough to encourage a Pound rally. Investors were more concerned by news that the Conservative lead over Labour had continued to erode, even though various opinion polls disagreed over the size of the gap between the two parties. Worries over the prospect of a hung parliament dented demand for Sterling, suggesting that the economy is likely to come under greater pressure in the coming months if the current atmosphere of uncertainty persists.
Rand Under Pressure as South Africa Returns to Recession
In spite of mounting election jitters the GBP ZAR exchange rate strengthened sharply on Tuesday, benefitting from a disappointing South African gross domestic product report. While growth on the year clocked in at a robust 1% the quarterly figure proved rather weaker. As the economy was found to have contracted by -0.7% in the first quarter, contrary to forecasts, the mood towards the Rand soured markedly. Given the uncertainty that continues to cloud the political outlook this fresh sign of economic weakness weighed heavily on market sentiment.
This saw the South African economy fall back into recession for the second time in eight years, highlighting the economy’s continued vulnerability. This encouraged the GBP ZAR exchange rate to jump 1.44% during Tuesday’s European session, with the country’s economic woes unlikely to ease in the near future.
UK Election Results to Provoke Pound Volatility
The Pound may struggle to hold onto its bullish gains for long, however. The ultimate results of the snap general election are likely to provoke renewed volatility for GBP exchange rates, regardless of the outcome. An increased Conservative majority could see Sterling trending higher across the board, having been dented by the narrowing seen in recent opinion polls. On the other hand, if the Tories fail to expand their majority and Labour experiences a surge in support the appeal of the Pound could weaken sharply.
Anything less than a larger Conservative majority is likely to provoke fresh Brexit-based jitters, given the imminent start of negotiations with the EU. While Theresa May is likely to continue to pursue a hard line of Brexit rhetoric if re-elected investors remain wary of the prospect of a major political change at this juncture. This could leave the GBP ZAR exchange on the back foot, even if wider market risk appetite remains muted.