GBP ZAR Exchange Rate Boosted by Market Risk Aversion

March 8, 2017 - Written by Tim Boyer

STORY LINK GBP ZAR Exchange Rate Boosted by Market Risk Aversion

The British Pound to South African Dollar exchange rate surged on Thursday afternoon. Demand for emerging market currencies like the Rand faded on Thursday as traders increasingly anticipated Friday’s US Non-Farm Payroll figures.

If the February US employment data impresses investors, more investors will become confidence that the Federal Reserve will hike rates next week which will see investors looking for ‘safe haven’ investments.

[Previously updated 08/03/2017]

With risk appetite limited the Pound to South African Rand exchange rate was encouraged to trend higher throughout Wednesday’s European session, despite a lacklustre Spring Budget.

Spring Budget Has Muted Impact on GBP

Confidence in Sterling was generally weakened after the House of Lords voted to amend the government’s Article 50 bill, stipulating that MPs must have a final vote on the Brexit deal.

This potentially throws a wrench in Theresa May’s proposed Brexit timetable, suggesting that she will not be able to trigger formal exit proceedings as soon as planned.

As Chancellor Philip Hammond failed to excite the markets with his budget statement, with investors instead focusing on the less optimistic than hoped Office for Budget Responsibility forecasts.

The OBR noted in its executive summary that:

‘Thanks largely to a weaker outlook for whole economy inflation, we expect weaker cumulative growth in nominal GDP over the forecast than in November, while its composition is also slightly less favourable for tax receipts. We have made no changes to our policy assumptions regarding Brexit.’

Although optimism in the outlook of the UK economy weakened this was not enough to prevent the GBP ZAR exchange rate from making solid gains, however.

ZAR Under Pressure from Reduced Risk Appetite

Tuesday’s disappointing fourth quarter South African gross domestic product report has continued to weigh on the Rand.

With growth having unexpectedly contracted -0.3% on the quarter at the end of 2016 investors have seen little reason to be confident in the outlook of the economy.

Coupled with the rising odds of an imminent Federal Reserve interest rate increase and a mixed raft of Chinese trade data this weighed heavily on ZAR exchange rates.

As the US Dollar remained on a bullish run ahead of February’s non-farm payrolls data the appeal of the higher-risk Rand was relatively limited.

GBP ZAR Exchange Rate Weakness Forecast on Widened Trade Deficit

The Pound could trend lower ahead of the weekend, with forecasts pointing towards a widening of January’s visible trade deficit.

A wider trade deficit would not bode well for the resilience of the UK economy and could encourage investors to continue selling out of Sterling.

Further evidence of economic weakness is also expected from the latest industrial and manufacturing production figures, which are predicted to show a fresh contraction on the month.

Even so, the GBP ZAR exchange rate may hold onto some of its recent gains if the US unemployment rate is found to have fallen to 4.7% as investors expect.

A strong showing here would give the Fed further reason to raise interest rates sooner rather than later, discouraging any resurgence in market risk appetite and leaving the Rand to flounder.

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TAGS: Pound Rand Forecasts