IMF Warning over South African Debt Levels Benefits Pound South African Rand (GBP/ZAR) Exchange Rate
The Pound Sterling to South African Rand (GBP/ZAR) exchange rate rallied ahead of the weekend as anxiety over South Africa’s financial outlook mounted.
As President Cyril Ramaphosa signed a controversial debt relief bill into law the South African Rand (ZAR) fell further out of favour with investors.
Markets were also spooked by comments from the International Monetary Fund (IMF), which warned that the country’s debt level is approaching its ‘red line’.
With debt nearing 60% of South Africa’s gross domestic product there are fears that an IMF bailout could be in its future.
Investors see little chance of the country remedying its low economic growth and high unemployment rate in the coming months, especially with the global growth outlook deteriorating.
A general lack of market risk appetite also helped to drive ZAR exchange rates lower during Friday’s trading session.
Prospect of No Confidence Vote Fuels Pound Sterling (GBP) Optimism
As UK MPs continued to discuss a possible no confidence vote in Boris Johnson the mood towards Pound Sterling (GBP) improved.
Discussions between opposition MPs and Conservative rebels encouraged hopes that the UK could still avoid crashing out of the EU without a deal at the end of October.
However, the positive momentum could prove short-lived as long as the lingering sense of political uncertainty remains.
The mood towards the Pound may sour in the coming week as forecasts point towards another weak reading from the CBI industrial trends orders index.
If the index remains firmly within negative territory, pointing towards weaker growth within the industrial sector, GBP exchange rates could stumble.
Fresh evidence that the UK economy is struggling in the face of Brexit-based anxiety could see the Pound trending lower across the board once again.
The increasing odds of a potential UK recession may push the GBP/ZAR exchange rate further away from its recent highs.
Weakening Inflation Set to Dent South African Rand (ZAR)
Significant volatility is likely in store for the South African Rand with the release of July’s consumer price index report.
Forecasts point towards the headline inflation rate easing from 4.5% to 4.4% on the year, reflecting a weakening in price pressures.
Although this would still fall comfortably within the South African Reserve Bank’s (SARB) target range ZAR exchange rates could slump in response to such a decline.
With the SARB already facing pressure to cut interest rates in the face of increasingly dovish global monetary policy, a dip in inflation may add to the case for looser policy.
If the SARB appears more likely to deliver another rate cut before the end of the year this could drag the South African Rand lower across the board.