A sharp, surprise widening of South Africa’s current account deficit put significant pressure on the Rand on Thursday. This poor showing suggests that the domestic economy is in a rather weaker state than investors had hoped, boding ill for the appeal of the Rand.
The GBP ZAR exchange rate leapt higher in the immediate wake of the Bank of England’s (BoE) September meeting, even though policymakers still voted 7-2 in favour of leaving interest rates unchanged. Markets were instead encouraged by the unexpectedly hawkish nature of the accompanying minutes, which noted that monetary tightening could be appropriate ‘in the coming months’.
This fuelled bets that the central bank could be on track to raise interest rates as soon as November or December, prompting investors to pile back into the Pound. Further hawkish comments from the former arch-dove of the Monetary Policy Committee (MPC) Gertjan Vlieghe helped to boost Sterling even further ahead of the weekend.
However, risk appetite recovered somewhat on Monday as global geopolitical tensions showed no signs of escalating. A lack of fresh North Korean missile tests improved the appeal of higher-yielding currencies, offering some measure of support to the Rand.
Even so, local political worries have remained a significant headwind for ZAR exchange rates, undermining confidence in the South African economic outlook. As the scandal surrounding President Jacob Zuma’s connections to the wealthy Gupta family continues to hang over South Africa the upside potential of the Rand remains limited.
ZAR Jittery Ahead of Inflation Data and SARB Decision
Confidence in the Rand could deteriorate further if South Africa’s inflation rate is found to have strengthened in August. Inflation is forecast to have risen from 4.6% to 4.9% on the year, reversing much of the improvement seen in July’s data and giving the South African Reserve Bank (SARB) a fresh headache.
An uptick here would indicate that the SARB is still struggling to keep inflationary pressure under control, putting the prospect of another interest rate cut firmly on the table. This would not bode well for South Africa’s attempts to climb out of recession, adding to the downside pressure on the Rand.
As a result the GBP ZAR exchange rate is likely to see increased volatility ahead of Thursday’s SARB policy meeting. Markets already anticipate an interest rate cut from the central bank, which could offer the Rand a rallying point if this ultimately fails to materialise.
Weak Retail Sales May Weigh on GBP
Demand for the Pound, meanwhile, could weaken if the latest UK retail sales data fails to impress. As forecasts point towards a stagnation in sales on the month this could dent GBP exchange rates, signalling a loss of confidence amongst consumers.
Given that the UK’s economic growth is largely based on a strong service sector and high levels of consumer spending any weakness in retail sales is likely to discourage investors. On the other hand, any signs of persistent resilience amongst consumers may boost GBP exchange rates once again.
Focus will also fall on the latest speech from Theresa May, who is expected to outline some of her views on Brexit on Friday. In the wake of the latest Cabinet row on the matter investors are keen to see whether the Prime Minister is softening her stance at all.