Plummeting Confidence in South African Economy Fuels GBP/ZAR Exchange Rate Jump
UPDATE 15:43 BST: The Pound (GBP) has risen sharply against the South African Rand (ZAR) today, hitting its best pairing exchange rate since December 2017.
This strong Pound Sterling performance is more down to trader confidence in the Rand evaporating than any supportive UK data.
The Rand is known as a ‘high-risk’ currency and risk sentiment has fallen sharply today, although previous GDP figures have also battered the ZAR.
South African GDP data on Tuesday has had a lingering negative effect on the Rand, given how disappointing it proved.
Quarter-on-quarter growth fell by -2.2% in Q1 2018, exceeding the worst forecasts for a -0.5% slowdown.
Pound to South African Rand (GBP/ZAR) Exchange Rate Climbs as UK Services Beat Forecasts
After falling at the beginning of the week, the Pound Sterling to South African Rand (GBP/ZAR) exchange rate put in a modest recovery on Tuesday morning. This was due to the publication of a stronger-than-expected UK services PMI.
Last week, trade war fears caused the South African Rand (ZAR) to weaken considerably and helped GBP/ZAR surge from the interbank level of R16.60 to R16.95.
On Monday, GBP/ZAR slumped back to below R16.80, but climbed again on Tuesday when the UK services PMI was published.
Despite Brexit uncertainties and a cloudy UK economic outlook weighing on the Pound (GBP), the Pound to South African Rand exchange rate could see further gains in the coming sessions unless upcoming South African data impresses.
Notable, South African manufacturing production data from April could indicate whether last year’s economic recovery was being sustained.
Pound (GBP) Exchange Rate Support Strengthened by UK Services Results
Tuesday saw the publication of Britain’s May services PMI, which beat expectations and completed a hat-trick of better-than-expected UK PMI reports for the month.
UK services were forecast to have improved just slightly, from 52.8 to 53, but instead jumped to 54 indicating a rebound from the poor performance seen earlier in the year.
Still, while the data hinted at a rebound, analysts warned markets not to get too bullish. According to Chris Williamson, Chief Business Economist at IHS Markit:
‘The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but, like the earlier manufacturing and construction surveys, raises questions about the outlook. So far, the three PMI surveys indicate that GDP looks set to rise by 0.3 – 0.4% in the second quarter.’
Williamson went on to point out ‘disappointing inflows of new work’ and noted that Brexit uncertainty was likely to continue to keep economic activity from improving too much.
As a result, while the Pound (GBP) bounced back on Tuesday it was not able to recover all of the losses seen against the Rand (ZAR) on Monday.
South African Rand (ZAR) Exchange Rates Weaken as South African Growth Slumps
On Tuesday, South Africa’s latest growth results made it even easier for the Pound to South African Rand (GBP/ZAR) exchange rate to recover some of the losses seen at the beginning of the week.
Investors had been hoping for the latest SA growth stats to show that the nation’s strong economic growth from 2017 was continuing.
However, South Africa’s quarter-on-quarter growth results plunged from 3.1% to a contraction of -2.2%, well below the forecast -0.5%.
The yearly figure was disappointing too, slumping from 1.5% to 0.8% rather than rising to 1.9% as forecast.
On top of trade war jitters weighing on risk-sensitive emerging market currencies like the South African Rand (ZAR), the currency was now pressured by domestic data too.
Investors are unlikely to buy the Rand unless April’s SA manufacturing stats are much better than expected.
Pound to South African Rand (GBP/ZAR) Forecast: South African Manufacturing Stats in Focus
Amid a lack of notable UK data due for publication in the second half of the week, the Pound to South African Rand (GBP/ZAR) exchange rate is more likely to react to UK political developments and the strength of the South African Rand (ZAR).
Rand trade is likely to be influenced by Thursday’s anticipated South African manufacturing production results from April, which will give investors a better idea whether the nation has sustained any of the economic strength it saw last year.
South African growth slowed down in Q1, but signs of an April rebound may help the Rand to strengthen again.
If the Rand is supported by manufacturing data or higher demand for risky emerging market currencies towards the end of the week, GBP/ZAR could still end the week lower.
However, if there are no concerning Brexit developments or if Bank of England (BoE) officials are optimistic in upcoming speeches, the Pound to South African Rand (GBP/ZAR) exchange rate could recover its weekly losses.