GBP to ZAR Exchange Rate Slumps to Worst June Levels on Monetary Policy Divergence Speculation

June 18, 2019 - Written by John Cameron

STORY LINK GBP to ZAR Exchange Rate Slumps to Worst June Levels on Monetary Policy Divergence Speculation

Despite South Africa’s recent political uncertainties and growth fears, the British Pound to South African Rand (GBP/ZAR) exchange rate plummeted today. Signs that major Central Banks were planning interest rate cuts while the South African Reserve Bank (SARB) would likely not cut rates much made it easier for the South African Rand to capitalise on the Pound’s latest Brexit-inspired weakness.

Recovering from its recent lows, the South African Rand benefitted from continued Pound weakness last week, and GBP/ZAR tumbled from 19.04 to 18.62 throughout the week. After a brief attempt to hold its ground earlier in the week, GBP/ZAR has continued to slide and at the time of writing the pair trended close to lows of 18.18. This was the worst GBP/ZAR level in almost a month, since the second half of May.

Demand for the Rand has been supported by global Central Bank speculation, rather than any domestic news. Rand investors are currently anticipating an upcoming State of the Nation Address (SONA) from South African President Cyril Ramaphosa.

GBP Exchange Rates Slide as Conservative Party Contest Worsens No-Deal Brexit Fears

While the South African Rand’s surge on Central Bank speculation was the primary cause of GBP/ZAR movement today, the Rand was also capitalising on the Pound’s own weakness.

Investors sold the Pound throughout the day, as markets perceived it as increasingly likely that hard Brexit advocate Boris Johnson would win the ongoing Conservative Party leadership contest, and that this might worsen the chances of a no-deal Brexit becoming reality.

The current outgoing Prime Minister, Theresa May, had put her soft Brexit plan to UK Parliament multiple times, and each time it failed.

Attempts to negotiate a softer Brexit also fell through, leaving May out of time. With May’s successor looking likely to be someone who advocates for a harder Brexit, analysts are speculating that the chances of a soft Brexit are falling too.

According to Stephen Gallo, Currency Strategist at BMO Capital Markets:

‘For there to be a ‘soft Brexit’, MPs will have to either approve the existing Withdrawal Agreement or Brussels will have to renegotiate … neither looks that likely at this stage,’

The second round of MP voting for the Conservative Party membership contest is taking place today, and Boris Johnson is still expected to be far in front.

ZAR Exchange Rates Rebound on Central Bank Speculation

Despite a lack of solid domestic support, and lingering South African political uncertainties, the South African Rand saw a surge in demand today.

Demand for the Rand on Tuesday afternoon was largely supported by speculation that major Central Banks, including the European Central Bank (ECB) and Federal Reserve, were likely to cut interest rates over the next year.

This, combined with expectations that the South African Reserve Bank (SARB) was unlikely to cut interest rates as much as peers, meant the SARB was perceived as having a tighter monetary policy outlook in comparison.

Market hopes for South African President Cyril Ramaphosa’s State of the Nation Address (SONA) to soften some of the recent political concerns are also keeping the Rand buoyed.

GBP/ZAR Exchange Rate Forecast: Political and Central Bank News Remains in Focus

The South African Rand’s rebound from its recent lows today was likely to be temporary, but the Rand could see further gains if upcoming South African economic or political news impresses investors – or global Central Bank news continues to support the Rand outlook.

South African Reserve Bank (SARB) interest rate bets could be influenced by tomorrow’s upcoming South African inflation rate data from May if it surprises investors, or if Federal Reserve interest rate cut bets change following tomorrow’s Fed decision.

Otherwise though, South African Rand investors will be anticipating Thursday’s political news.

South African President Cyril Ramaphosa will be holding the State of the Nation Address (SONA) speech on Thursday, and there are hopes his speech will soften short-term concerns about the independence of the SARB, as well as South Africa’s ongoing energy issues.

While the South African Rand will be influenced by domestic and global political and Central Bank news, the Pound will be influenced by overnight developments in the Conservative Party leadership contest.

The Pound to South African Rand exchange rate’s movement may also be influenced by tomorrow’s UK inflation rate report if it misses analyst expectations in some way.

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TAGS: Pound Rand Forecasts