A marked improvement in South Africa’s Standard Bank PMI helped to bolster demand for the Rand on Thursday, particularly as risk appetite remained generally heightened. Solid Chinese data and high hopes that the US will increase its infrastructure investment saw commodity prices climbing once again. With the South African economy demonstrating signs of resilience, in spite of ongoing political worries, there was thus little reason for investors not to favour the higher-yielding Rand over many of its rivals.
The latest raft of UK PMIs seemed to reaffirm the more limited than expected impact of the Brexit vote on the economy, with all three sectors demonstrating solid growth on the month. Of particular encouragement was the strong increase in the Services PMI, given that the majority of the UK’s economic growth stems from the sector. This offered the Pound a rallying point ahead of the weekend, even though jitters over Brexit remained.
Confidence in Sterling plunged sharply on Monday in the wake of Theresa May’s first television interview of the year, with the currency dropping in response to the comment that the government will not try to keep ‘bits’ of EU membership. Investors took this to mean that the UK is likely to lose its privileged access to the single market, reacting with disappointment and selling out of the Pound. While this was far from a concrete statement of intent, the general lack of clarity over the government’s negotiating plan has left the market with little reason to be optimistic with regards to the outlook of Sterling. As a result the GBP ZAR exchange rate slumped once again.
The appeal of the Rand was limited, however, by a disappointing South African foreign exchange reserves figure, which saw a more limited widening than forecast. With an accompanying dip in new vehicle sales for December, confidence in the health of the domestic economy was knocked slightly. The threat of a ratings downgrade continues to hang over the Rand, increasing the negative impact of disappointing data and limiting the currency’s gains against the Pound.
Further weakness could be in store for the GBP ZAR exchange rate if the UK trade deficit is found to have widened in line with forecasts in November. A wider deficit would underline the vulnerability of the domestic economy, with the post-referendum weakening of the Pound boding ill for the UK’s high level of borrowing. Even so, expectations are more positive for the latest industrial and manufacturing production figures, which could boost Sterling if output is shown to have recovered from October’s contraction.
Market risk appetite could strengthen in response to the Chinese Consumer Price Index, which is expected to show an uptick in December. While the odds remain high that the Federal Reserve will raise interest rates multiple times over the coming year, this could nevertheless shore up the Rand, boosting commodity prices in the short term.
Volatility is also likely for the Rand with the release of the South African manufacturing production figures. Following the sharp decline seen in October, markets are hoping to see a modest uptick on the month. Although this is unlikely to reverse the decline of the previous month, a positive showing here could encourage greater confidence in the Rand, easing some of the concerns surrounding South Africa’s economic robustness. Any disappointment here, however, could see the GBP ZAR exchange rate regaining some of its lost ground.
|Data Item||Market Expectation|
|7th January 01:30 China Consumer Price Index (YoY) (DEC)||2.30%|
|11th January 09:30 UK Visible Trade Balance (NOV)||-11.1billion|
|11th January 09:30 UK Industrial Production (YoY) (NOV)||0.60%|
|11th January 09:30 UK Manufacturing Production (YoY) (NOV)||0.60%|
|12th January 11:00 SA Manufacturing Production (YoY) (NOV)||0.40%|
© TorFX. Unauthorised copying or re-wording of this blog content is prohibited. The copyright of this content is owned by Tor Currency Exchange Ltd. Any unauthorised copying or re-wording will constitute an infringement of copyright.