Improved Economic Outlook from South African Reserve Bank (SARB) and Move to Oust President Jacob Zuma Push GBP/ZAR Exchange Rate Lower
Turbulence in the South African Rand enabled the GBP/ZAR exchange rate to rise early last week, even though Monday’s data calendar was empty and Tuesday’s inflation data weakened the odds of an interest rate hike from the Bank of England (BoE).
Things picked up in the latter half of the week, when several EU officials attempted to highlight that it was possible for the UK to change its mind over Brexit - either before or after it has been completed - and that the bloc would always be welcoming should the nation wish to re-join.
However, it was the Pound that fell against the Rand, with risk appetite proving the stronger driving factor and ensuring the Pound Sterling to South African Rand exchange rate ended the week not much higher than its opening levels.
A quiet data day on Monday made the Pound susceptible to further losses, although there is a sharp rebound today as the Rand awaits tomorrow’s inflation data and news on the fate of South African President Jacob Zuma’s political career.
South African Rand (ZAR) Unable to Hold Gains against Pound Sterling (GBP) After Volatile Week
The Pound Sterling to South African Rand exchange rate was able to make gains during the first half of last week, thanks in part to a mixed South African data calendar.
Tuesday’s release of November mining production figures disappointed markets, even if year-on-year mining production did accelerate from 5.2% to 6.5% instead of slowing as forecast.
Month-on-month mining production declined -0.7%, with the previous month’s growth revised down from 3.4% to 2.7%, dashing the expectations of economists for an acceleration to 5%.
Gold production fared even worse, tumbling -8.3% year-on-year to November, after an annualised -0.9% drop in October; forecasts had been for recovery to 1.3%.
Wednesday’s retail sales figures greatly-bettered forecasts, but nonetheless only caused a minor bounce for the ZAR/GBP exchange rate.
Year-on-year retail sales climbed 8.2%, more than double the forecast 4%, with month-on-month sales rising 4% against forecasts for 1.5% growth.
However, the approach of an interest rate decision from the South African Reserve Bank (SARB) on Thursday saw markets hold off on buying the South African Rand.
Rand Strengthens on Upbeat SARB Economic Outlook as Policymakers Look to Cut Rates to Encourage Growth
A positive economic outlook from the South African Reserve Bank undermined the GBP/ZAR exchange rate on Thursday.
Policymakers raised their estimates for 2017’s economic growth from 0.7% to 0.9%, for 2018 from 1.2% to 1.4% and for 2019 from 1.5% to 1.6%.
They also projected a slower pace of inflation than previously forecast, with price growth now expected to average 4.9% in 2018 rather than 5.2% and 5.4% in 2019 rather than the earlier estimate of 5.5%.
This saw one member of SARB’s Monetary Policy Committee (MPC) arguing for a rate cut, helping to boost hopes that the central bank could soon opt loosen monetary policy in order to help fuel further economic growth.
The MPC stated;
‘Domestic growth prospects appear to be showing some signs of improvement, although off a low base. This follows encouraging growth rates in the second and third quarters of this year, driven to a significant degree by the exceptionally strong recovery in the agricultural sector.’
‘This more favourable outlook is consistent with the further increase in the SARB’s composite leading business cycle indicator of economic activity in October. The outlook is also likely to be impacted positively should the recent political developments lead to a sustained boost in business and consumer confidence.’
GBP/ZAR Exchange Rate Forecast to Struggle if Hopes of Zuma Ousting Continue to Build
Regardless of what developments this week’s data calendar may bring, the Pound Sterling to South African Rand exchange rate could be susceptible to downside pressure if markets become more confident that South Africa’s ruling ANC party will vote to oust controversial President Jacob Zuma.
Zuma’s excessive spending, coupled with questionable relationships with some of South Africa’s highest profile businesses, have long caused political turmoil in South Africa, weighing on the economy and keeping the Rand on an unstable footing.
However, there was speculation over the weekend that the ANC’s executive committee had voted through resolution calling for the Zuma to be removed as President of South Africa – it has now been confirmed that talks are underway.
Returning to the economic calendar, tomorrow’s UK average weekly earnings data could provide the Pound some support if it shows pay growth has accelerated, as this will help to slow the decline in real wages and therefore support high levels of consumer spending.
Friday promises 2017 fourth-quarter GDP figures and a speech from Bank of England Governor Mark Carney at the World Economic Forum (WEF) gathering in Davos.
As for the South African economic calendar, tomorrow’s inflation data for December will be the most influential releases due out this week; a decline in inflation could boost the Rand, as this would suggest the SARB be will feel comfortable cutting interest rates in order to fuel further economic growth.