Pound to South African Rand Exchange Rate Advances despite Poor UK Data
A broad market hesitance to buy risky emerging market currencies has helped the Pound to South African Rand (GBP/ZAR) exchange rate to climb this week, despite continued signs that Britain’s economy is slowing down.
The South African Rand’s (ZAR) weakness is the primary reason that GBP/ZAR was able to advance slightly last week despite poor UK growth data. GBP/ZAR climbed from 16.89 to 16.98. This week GBP/ZAR has continued to climb and currently trends near a high of 17.28.
Tuesday saw the publication of the latest disappointing UK ecostats, which caused Bank of England (BoE) interest rate hike bets to fall and weakened the Pound (GBP).
Sterling could have seen even stronger gains against a weak Rand if UK data had been more impressive, as GBP/ZAR continues to climb regardless on low market appetite for currencies from emerging markets.
Pound (GBP) Exchange Rate Outlook Weighed by Underwhelming UK Manufacturing Report
Last week’s UK Gross Domestic Product (GDP) results indicated that Britain’s economy performed slower than expected in Q1 2018, and the latest UK data has indicated that the slowdown could be continuing in Q2.
Britain’s April manufacturing PMI from Markit was forecast to slip just slightly from 55.1 to 54.8, but instead slumped from a revised 54.9 to just 53.9. This marked the lowest level for the print in 17 months.
According to Duncan Brock from the Chartered Institute of Procurement & Supply, the UK consumer goods industry had a poor April in general:
‘Any hopes for an improvement to last month’s steady if unremarkable pace were dashed in April as new order growth was the slowest for ten months and the consumer goods sector was particularly hit reporting the first job losses since February 2017 and the fastest drop in hiring for six and a half years.’
With Q1 disappointing and Q2 off to a slow start, the Pound outlook has weakened considerably and investors do not expect the Bank of England (BoE) to remain as hawkish as it had been in recent months.
South African Rand (ZAR) Tumbles as US Yields Leave Emerging Market Currencies Unappealing
Expectations that the US economy will continue to strengthen and see tighter monetary policy has boosted demand for US 10-year Treasury bond yields.
With US bond yields and Federal Reserve interest rate hike bets rising, risky emerging market currencies like the South African Rand have seen much weaker demand.
Higher prices of major commodities like oil have put further pressure on the Rand, as emerging markets typically benefit more from lower commodity prices.
According to ETM market analyst Halen Bothma, investors are also anxious ahead of Wednesday’s Federal Reserve policy decision:
‘The Rand weakness is not an isolated move in the emerging markets, as the Dollar was broadly bid and gained against other EM’s. It’s mainly due to the risk sentiment in EM’s and the US treasury market. Also markets will react to what the FED says about the monetary policy on Wednesday,’
Pound to South African Rand (GBP/ZAR) Forecast: Central Bank Speculation in Focus
Wednesday’s Federal Reserve policy decision is likely to drive the South African Rand, while Thursday’s UK services PMI has the potential to influence Bank of England (BoE) speculation and Pound movement.
The Federal Reserve is not expected to make any changes to US monetary policy on Wednesday, but risky emerging market currencies like the Rand could weaken if the bank signals that it will ramp up the pace of monetary policy tightening.
Still, as the Rand has seen major losses on US Dollar (USD) strength and risk-sentiment lately the currency could rebound from its lows soon.
South Africa’s April manufacturing PMI will be published on Wednesday with the standard bank PMI due on Friday. As South Africa’s domestic outlook is generally optimistic, it may not fall much further.
GBP/ZAR could shed some of its gains if the Pound sees further downside pressure. For example, if UK services data disappoints on Thursday it could worsen Britain’s economic outlook and cause Pound to South African Rand (GBP/ZAR) exchange rate losses.