GBP ZAR Slumps on Weaker-Than-Expected UK Inflation
Demand for the Rand diminished sharply on the back of news that President Jacob Zuma had survived the latest vote of no-confidence against him. Investors were disappointed that the introduction of a secret ballot had failed to provoke a significant shift in the number of votes cast against Zuma.
With the current leadership remaining entrenched confidence in the outlook of the South African economy remains decidedly muted, particularly as the threat of further ratings downgrades still hang over the country.
However, the GBP ZAR exchange rate struggled to hold onto all of its resultant gains for long as Thursday’s UK ecostats proved rather discouraging. As the UK visible trade deficit unexpectedly widened from -11.3 billion to -12.7 billion in June this highlighted the persistent vulnerability of the economy to any deterioration in trade conditions. Also of concern was the NIESR gross domestic product estimate for the three months to July, with growth thought to have slowed from 0.3% to 0.2%.
Confidence in the Rand was further eroded as June’s raft of South African production data indicated a fresh contraction in output across the board, though. As mining output slumped by a sharp -2.6% on the month this highlighted the continued weakness of the domestic economy.
With economic conditions looking unlikely to improve materially in the coming months this kept the Rand on a softer footing. This helped to shore up the GBP EUR exchange rate ahead of the weekend, even as weaker US inflation boosted market risk appetite.
Rand Rallied as Threat to SARB Thrown Out
Markets greeted the announcement that the high court had set aside amendments to the South African Reserve Bank’s (SARB) mandate proposed by the Public Protector. This created a sense of relief for the Rand, with the SARB’s independence no longer seen to be under imminent threat.
Although worries remain over the domestic outlook this was enough to prompt a significant weakening for the GBP ZAR exchange rate on Tuesday.
Demand for the Pound also slumped in the wake of the UK’s July consumer price index, which indicated that inflationary pressure had held steady at 2.6% on the year.
This added to expectations that the Bank of England (BoE) will leave interest rates on hold for the foreseeable future, even though inflation is still outrunning the official target rate. While inflationary pressure eased by -0.1% on the month this was also not enough to diminish worries over the ongoing squeeze on household finances.
Weak UK Earnings Data Could Extend GBP ZAR Downtrend
Further volatility could be in store for the GBP ZAR exchange rate with the release of the latest UK average weekly earnings data on Wednesday. If wage growth is shown to remain some way behind inflation the appeal of the Pound could deteriorate, signalling the continuation of the consumer squeeze.
On the other hand, any uptick in wages could offer Sterling a rallying point, even though the chances of a 2017 BoE rate hike remain highly limited.
Support could be in store for the Rand, meanwhile, if June’s South African retail sales point towards an increase in consumer spending. A solid uptick in sales could ease some of the ongoing market worries over the state of the economy, even though inflation is still towards the higher end of the SARB’s target range.
Any signs that consumer confidence has been dented by recent political developments, though, may leave the Rand lacking in upside momentum.