GBP/ZAR Steady after SARB and Turkey Contagion Dents South African Rand

Pound South African Rand (GBP/ZAR) Exchange Rate Rally Slows

The Pound South African Rand (GBP/ZAR) exchange rate rose to near a seven-month high during yesterday’s session.

GBP/ZAR continues to trade above R21 so far this morning, although the South African Rand is recovering some lost ground.

Emerging market currencies suffered from contagion spreading from the Turkish Lira crashing, while the South African Reserve Bank (SARB) raised interest rates, but signalled increases will likely be slower than markets expected.

South African Rand (ZAR) Falls on Souring Sentiment and SARB Signals

The South African Rand (ZAR) fell through Thursday’s session as contagion from the Turkish Lira collapsing caused investors to drop the emerging market currency.

Following another sharp interest rate cut from the Central Bank of the Republic of Turkey (CBRT), the Turkish Lira crashed, with emerging market contagion causing the South African Rand to weaken.

Hints from the SARB that tightening monetary policy will be more gradual than previously expected also dented the South African Rand, despite raising hiking rates yesterday.

In a close vote of 3-2 on SARB’s monetary policy committee, the central bank raised interest rates from 3.5% to 3.75%, the first rate hike in three years.

SARB Governor Governor Lesetja Kganyago said inflation risks had increased since the September policy meeting, saying:

“Given the expected trajectory for headline inflation and upside risks, the committee believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates.”

ZAR exchange rates fell in the wake of the decision as markets repriced expectations on the SARB’s signals that tightening will take longer than expected.

Pound (GBP) Struggles as Retail Sales Improve

The Pound (GBP) is subdued so far today despite upbeat UK retail sales data released this morning.

October’s retail sales indicated growth for the first time in six months of 0.8%, above forecast of 0.5%

The Office for National Statistics commented on the data:

“Clothing stores reported an increase of 6.2% over the month with feedback from some retailers suggesting that early Christmas trading had boosted sales.

“This is supported by analysis within the coronavirus and social impacts release, which reported that the most common items bought or pre-ordered earlier than usual for Christmas this year included toys and clothes, shoes or accessories. The latest rise means clothing stores sales are now only 0.5% below their pre-coronavirus pandemic level.”

GBP/ZAR Forecast: Progress in UK-EU Talks to Support Pound?

The Pound South African Rand exchange rate may lack significant drivers to extend gains going into the weekend.

Reports on UK-EU talks over the Northern Ireland protocol may provide some support to GBP exchange rates as optimism appears to grow over progress in reaching an agreement.

Ahead of the UK’s Brexit Minister Lord Frost and European Commission vice-president Maroš Šefčovič meeting today, Irish Prime Minister Micheál Martin said the ‘mood music’ had changed and progress was encouraging.

However, uncertainty still lingers and the possibility of the UK government triggering Article 16 to suspend parts of the agreement remains, potentially sending Sterling lower.

Meanwhile, Moody’s and S&P Global will review South Africa’s credit rating later today, potentially driving some movement in ZAR exchange rates, although markets appear to have largely priced in expectations.

Andrew Roberts

Contact Andrew Roberts