Update: Chinese Tariff Announcement Weighs on Risk-Sensitive South African Rand
In the wake of the announcement that China will impose tariffs on 106-US produced goods the Pound to South African Rand (GBP/ZAR) exchange rate extended its gains further.
As the tariffs target high-impact products such as soy beans and aeroplanes there is a fear that the US economy could suffer significantly if the measures are actually brought into effect, which would have a knock-on impact on the wider global economy.
Naturally, this kept the South African Rand (ZAR) on a weaker footing over the course of Wednesday’s European trading session.
Underwhelming South African Manufacturing Data Boosts Pound South African Rand (GBP/ZAR) Exchange Rate
In a disappointing development for the South African economy March’s manufacturing PMI unexpectedly fell from 50.8 to 46.9, offering a fresh boost to the Pound to South African Rand (GBP/ZAR) exchange rate.
This weaker showing, with the sector falling back into contraction territory, undermined the recent sense of optimism surrounding the outlook for the economy.
With the positive impact of President Cyril Ramaphosa’s new administration yet to be felt, the mood towards the South African Rand (ZAR) has soured somewhat.
Concerns over the global trade outlook also put pressure on ZAR exchange rates this week, with the US and China inching closer to the prospect of a full-blown trade war.
As investors were encouraged to sell out of risk-sensitive assets this helped to boost the GBP/ZAR exchange rate to a fortnightly high.
Pound (GBP) Exchange Rates Falter as UK Construction Sector Contracts
The underlying support for the GBP/ZAR exchange rate was somewhat limited by the less encouraging nature of the latest raft of UK PMIs.
While March’s manufacturing PMI picked up modestly on the month, from 55.0 to 55.1, this was shortly followed by a much weaker-than-forecast construction PMI.
As the construction index unexpectedly plunged from 51.4 to 47.0 this pushed the sector back into a state of contraction, giving investors little cause for confidence in the domestic outlook.
Even so, as the construction and manufacturing sectors represent only a small proportion of the UK gross domestic product, the Pound (GBP) could still rally on a solid services PMI.
If the service sector demonstrates resilience at the end of the first quarter this may encourage GBP exchange rates to trend higher across the board.
However, if the services PMI also falls short of forecast this is likely to take the wind out of the GBP/ZAR exchange rate’s sails.
Unless markets see reason to expect a recovery in UK economic growth in the first quarter of 2018 the appeal of the Pound looks set to remain muted.
Global Trade Tensions Forecast to Limit South African Rand Appeal
Further gains could be in store for the GBP/ZAR exchange rate if Thursday’s South African Standard Bank PMI proves similarly discouraging.
Focus will also fall on the latest SACCI business confidence index, with investors hoping to see some evidence of an improvement in sentiment.
Any signs of weakness within the South African economy are likely to encourage further selling of the Rand, especially if the wider sense of market risk appetite continues to deteriorate.
An escalation of tensions between the US and China could keep the Rand in a state of retreat, meanwhile, as investors flee back to safe-haven currencies.
On the other hand, if there is any indication that the two sides could back down and come to a more amicable agreement on trade this may give ZAR exchange rates a solid rallying point.