Pound to Rand (GBP/ZAR) Exchange Rate Holds Decline before SARB Decision

Updated 15/05/2014

On Thursday the Rand held gains against the Pound even as the emerging-market asset came under domestic pressures.

Earlier this week the Rand broke through the key resistance level of 10.30 against the US Dollar thanks to improved risk sentiment and indications that US interest rates will remain on hold.

While the Rand has since pared some of these gains against the ‘Greenback’ as a result of lowered expectations for a South African interest rate hike and ongoing violence in the nation’s platinum mining sector, the currency continues to trade higher against the Pound.

Yesterday the Pound posted widespread declines as investors reacted to a slightly disappointing UK employment report and surprisingly dovish remarks from the Bank of England.

Sterling softened to multi-week lows against several of its most traded currency counterparts as UK jobless claims fell by less-than-expected and average weekly wages grew by 1.7 per cent rather than the 2.1 per cent forecast.

The BoE also opted to dampen speculation regarding an interest rate increase occurring before the end of the year.

As investors had been betting that the recent run of positive UK economic reports would push the central bank into hiking borrowing costs sooner rather than later, these remarks saw the Pound lose appeal.

Yesterday’s South African retail sales report showed year-on-year growth of just 1.0 per cent in March, down from expansion of 2.3 per cent the previous month.
This report adds to the case for the South African Reserve Bank refraining from raising interest rates next week.

As one industry expert observed; ‘For a market assessing the likelihood of imminent SARB tightening … the weak retail sales print will serve as a timely reminder of the ongoing bearish news on the real economy.’

While this fact put pressure on the Rand’s relationship with the US Dollar, the currency maintained the higher ground against Sterling.

Today’s Eurozone growth/inflation data and manufacturing/industrial manufacturing reports for the US could have an impact on the Rand as the day continues.

Original Text, Published 14/05/2014

The Pound to South African Rand exchange rate softened during European trading as the appeal of the Pound dimmed in the wake of UK data.

The Rand rallied to a fresh yearly high against the US Dollar on Tuesday and was holding gains against its North American rival on Wednesday.

While ongoing violence in South Africa’s platinum mining sector is a cause for concern, improved risk appetite and an easing in Ukraine tensions helped the Rand push beyond 10.30 against the US Dollar – and further gains are forecast for the commodity-driven asset.

Although the US Federal Reserve is likely to persist with the steady tapering of stimulus, disappointing US reports (like yesterday’s advance retail sales figures) may see the central bank opting to leave interest rates at record lows long term, a stance which would bolster emerging-market currencies like the Rand.

A statement issued by Moody’s Investors Service also lent the Rand some support. The top credit rating agency stated that while South Africa’s Baa1 rating remains under pressure, a downgrade isn’t necessarily on the horizon.

Moody’s official Kristin Lindow commented; ‘The economy just can’t quite recover from the recession, even though the recession was very mild here. The indicative rating range of A2 to Baa1 does belie negative pressure, but it does not necessarily mean that the rating will be downgraded.’

However, if the ongoing strikes and bouts of violence in South Africa’s mining sector persist, the Rand could falter.

Also today, South Africa’s retail sales figures showed that sales plummeted by 1.4 per cent in March, month-on-month, after declining by 0.2 per cent in February.

Sales were up just 1.0 per cent on the year, less than half the 2.2 per cent annual gain recorded the previous month.

While this domestic report was disappointing, the Rand continued to perform well against the Pound after its release.

Sterling was struggling against the majority of its currency counterparts after figures showed that UK unemployment claims fell by less than expected in April.

The Pound also weakened against peers like the Rand after the Bank of England’s inflation report indicated that interest rates will remain on hold.

As investors digested the UK developments senior currency strategist Jane Foley observed; ‘The Pound has had a setback. There is good reason for Carney not to be in a particular rush to raise interest rates. His tone has served to curb some of the over-optimism that has been brewing recently.’

Although economic reports for both the UK and South Africa are lacking for the rest of the week, global economic developments could inspire more GBP/ZAR movement before the weekend.