Pound to South African Rand Gains Limited by Fresh Pound Weakness
The Pound (GBP) saw a surge in demand last week, but while the Pound Sterling to South African Rand (GBP/ZAR) exchange rate is still climbing the pair’s gains have been limited. Investors are hesitant to buy the Pound as risk-aversion is returning.
Due to the South African Rand’s (ZAR) significant weakness, GBP/ZAR surged last week. After opening the week at the level of 20.51, GBP/ZAR saw mixed movement before rocketing in the second half of the week.
GBP/ZAR closed the week almost a Rand and a half higher in the region of 21.91.
This morning, GBP/ZAR briefly jumped higher and touched on a high of 22.47. This was the best level for GBP/ZAR since the 2016 Brexit vote.
At the time of writing, GBP/ZAR trends a little lower in the region of 22.11. It is still trending higher overall as investors sell the South African Rand, due to news that South Africa had lost its final remaining investment-grade rating from Moody’s.
Pound (GBP) Exchange Rates Also Suffer from Credit Rating Cut Gloom
Last week, the Pound (GBP) saw a resurgence in demand following weeks of poor performance. The British currency rebounded from its cheapest levels due to improved liquidity in global markets. This helped it to capitalise on the South African Rand’s (ZAR) weakness.
However, while the Pound continues to climb against the Rand today, its gains are limited.
The Pound tumbled against most major currencies when markets opened today.
Due to a lack of supportive UK news, the Pound lacked the drive to keep climbing. On top of this, the Pound was weakened by news that Fitch had downgraded its UK credit rating.
Britain’s Long-Term credit rating was downgraded to AA- with a negative outlook. According to a reaction from Analysts at TD Securities, the news may not hurt the Pound for long:
‘In a decision that will not come as a huge surprise, Fitch downgraded the UK’s Long-Term credit rating to AA- on Friday night.
This rating downgrade does not change the medium-term direction or risks around the UK. If we see any FX market reaction at all, we think it will ultimately be only a small blip amid the current market volatility.’
South African Rand (ZAR) Exchange Rates Slump as Moody’s Finally Downgrades Credit Rating
For years, markets have had a ‘will they won’t they’ speculation see-saw regarding South Africa’s final positive investment-grade credit rating.
Both S&P and Fitch downgraded South Africa’s credit rating to junk back in 2017, but the Moody’s credit rating had remained positive.
Speculation persisted every few months since 2017, over whether South Africa’s economy was strong enough to maintain the positive rating.
However, over the weekend Moody’s finally chopped the rating to junk, due at least in part to the impact South Africa’s coronavirus lockdown will have on the country. The rating was downgraded from Ba1 to Baa3, with a negative outlook.
Nema Ramkhelawan-Bhana, Analyst at Rand Merchant Bank in Johannesburg, said the downgrade’s long-term impact was still uncertain:
‘Perhaps the downgrade is a catalyst for much-needed structural reform,
The end state remains unclear, especially as South Africa sinks further into the abyss of recession.’
Overall though, the South African Rand (ZAR) saw sharp selling today as investors digested the news.
Pound to South African Rand (GBP/ZAR) Exchange Rate Outlook Limited amid Lack of Support
Both the Pound (GBP) and South African Rand (ZAR) may struggle for direction over the coming weeks.
The currencies are both currently being weighed by domestic coronavirus outlooks and global growth fears. Both Britain and South Africa are expected to see significant slowdown as a result of lockdown.
However, South Africa’s new Moody’s junk rating could leave it the less appealing of the two overall. This news could mean that GBP/ZAR sustains this week’s gains more easily.
Market demand for Sterling could be boosted further depending on potential fiscal stimulus news. If the UK Treasury ramps up stimulus the Pound could see more solid demand.
The Rand may not see much in the way if support due to South Africa’s concerning economic outlook, unless investors opt to buy it from its lows.
As a result, the Pound to South African Rand (GBP/ZAR) exchange rate is likely to keep climbing.