Pound Sterling Weakens against South African Rand as Market Focus on New SA Budget Undermines GBP/ZAR Exchange Rate
After a flat start to the week the Pound Sterling to South African Rand exchange rate slumped last Tuesday, with markets unimpressed by the latest UK data or comments from several Bank of England (BoE) officials.
Despite a surprise uptick in average weekly earnings excluding bonuses growth, the ILO unemployment rate crept higher to 4.4% and public sector borrowing saw a larger-than-expected deficit of -£11.6 billion.
Further weighing on Sterling were comments from BoE Governor Mark Carney; although he claimed the Monetary Policy Committee (MPC) may have to hike interest rates three times in as many years – compared to earlier predictions of twice – he also avoided commenting on when the first hike may come.
This somewhat dampened expectations that the MPC would vote to hike interest rates in the May policy meeting.
A surprise downwards revision to fourth-quarter 2017 GDP estimates from the Office for National Statistics (ONS) may not have seen traders warm to the Pound, but weakness in the South African Rand dragged the GBP/ZAR exchange rate higher.
South African Rand Supported by New Budget to Tackle Deficit; GBP/ZAR Exchange Rate Undercut
The only economic releases for South Africa last week were the January inflation figures published on Wednesday 21st, which showed a larger-than-expected slowdown in the pace of consumer price growth.
Inflation has now dropped down to the middle of the South African Reserve Bank’s (SARB) target range; a positive development for the Rand as it means the economy is well-balanced and that sudden sharp adjustments in policy are likely unnecessary.
The Rand largely received support due to anticipation of and reaction to the new government budget delivered by Finance Minister Malusi Gigaba on Wednesday.
Since President Jacob Zuma was forced out of office, new President Cyril Ramaphosa has signalled his intention to turn around the country’s finances by cutting debts, reducing corruption and attempting to keep ratings agency Moody’s upbeat so that it does not cut the nation’s credit rating to ‘junk’ status.
Markets welcomed the news that VAT would be increased from 14% to 15% from 1st April; the first time in a decade-and-a-half that the tax has been changed and a strong signal from the government that it intends to make the difficult choices necessary to heal the flagging economy.
UK PMIs Forecast to Weaken GBP/ZAR Exchange Rate if February Readings Show Continued Economic Weakness
There is a smattering of low-impact data set for release tomorrow, but things pick up for the UK on Thursday and Friday, meaning GBP/ZAR exchange rate volatility can be expected as the weekend approaches.
IHS Markit will release its February manufacturing and construction indices on Thursday and Friday respectively, giving markets a better insight into the health of the UK economy as the end of the first-quarter approaches.
These will act as a bellwether for the vital services index next week, so weak performances here would see Pound Sterling tumble versus the South African Rand.
Mark Carney is set to speak at the Scottish Economics Conference in Edinburgh on Friday, so markets will be hoping he might be feeling more inclined to hint at the timing of the next UK interest rate hike; anything after May would weaken GBP/ZAR.
There is a lot of South African data set for release over the coming days, so markets will have something other than politics to focus on this week.
Tomorrow sees the release of money supply and producer price indices, as well as the latest balance of trade, which is predicted to see the surplus shrink noticeably.
Thursday sees the publication of the ABSA manufacturing PMI, while the Standard Bank PMI follows on Monday.
Tuesday will be a significant day as the 2017 fourth-quarter GDP figures are set for release; year-on-year growth is expected to rise from 0.8% to 1.3%, but quarter-on-quarter growth is predicted to slow from 2% to 1.3%.