South Africa’s new finance minister, Malusi Gigaba, handled his first budget presentation on Wednesday, and the Pound Rand exchange rate soared as investors expressed disappointment with the details.
GBP ZAR gains have been limited by Brexit concerns, but the pair has still surged from around 18.01 and trended near a one-year-high of 18.89 on Thursday. This was the pair’s best level since September 2016.
Pound (GBP) Outlook Clouded by Persistent Brexit Anxieties
While the Pound Rand exchange rate has advanced this week, this has been largely due to Rand weakness, as the Pound itself has been volatile in recent sessions.
Markets have been increasingly focused on the chances of a November interest rate hike from the Bank of England (BoE).
BoE interest rate hike bets briefly jumped on Wednesday due to a better-than-expected UK Gross Domestic Product (GDP) projection for Q3.
However, with the meeting now just a week away, many analysts and investors remain unsure that Britain’s economy is strong enough to support higher interest rates.
These concerns have been worsened by uncertainties about the Brexit process, as fresh reports emerge about disagreements within the UK Conservative Party as well as between UK and EU negotiators.
Economic news put further pressure on Pound strength during Thursday trade.
Car production is reported to have slowed because of business uncertainty about the Brexit process, while a report from the Confederation of British Industry (CBI) indicated that British retail activity had seen a sudden, sharp drop in October.
This was supposedly the biggest drop in the print since 2009 – the height of the global recession.
Still, the Pound was able to hold its highs against a considerably weak South African Rand and is likely to do so until the end of the week, amid a lack of key UK data due in the coming days.
Next week, investors are likely to turn their attention towards the Bank of England and its Thursday policy decision.
Any decision the bank makes is likely to surprise some investors, with many now betting the bank will leave policy frozen while others still believe a UK interest rate hike is on the cards.
If the bank leaves UK interest rates frozen in its meeting, GBP ZAR is likely to plunge, but the pair would soar if the bank announced a rate hike after all.
Any developments in the Brexit process, as well as Markit’s October services PMI next Friday, could also have an impact on the Pound outlook.
South African Rand (ZAR) Undermined by Concerning Budget Speech
On Wednesday, a budget speech was delivered by South Africa’s still relatively new finance minister, Malusi Gigaba.
The speech was surrounded by controversy about rumours that SA President Jacob Zuma was planning to sack Deputy President Cyril Ramaphosa, but the economic content of the speech itself was highly concerning too.
Gigaba revealed that the SA Government now expects the nation’s budget deficit to be much worse than expected, with the nation now forecast to see slower growth in 2017 too.
Previously, South Africa’s economy was forecast to grow at a pace of around 1.3% this year, but the latest government forecast is just 0.7%. Gigaba also indicated that there were no near-term solutions to resolving these issues.
This news caused the South African Rand to plummet, and demand only worsened amid speculation that credit ratings agencies may look to downgrade the nation’s ratings.
Many analysts believe that agencies are likely to wait for December’s ANC elective conference before making any major decisions.
Overall, markets are now a lot less optimistic about South Africa’s economic outlook and things could worsen depending on how the ANC conference goes in December.
It’s possible the South African Rand outlook could improve slightly if upcoming economic data beats expectations though.
Tuesday will see the publication of South Africa’s September trade balance results, as well as the key Q3 unemployment rate.
GBP ZAR Interbank Rate
At the time of writing this article, the Pound Rand exchange rate trended in the region of 18.82. The South African Rand to Pound exchange rate traded at around 0.05305.
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