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GBP ZAR Exchange Rate Surges Higher on Seventh Month of South African Manufacturing Sector Contraction

January 12, 2018 - Written by Frank Davies

After a volatile week of trading the Pound South African Rand (GBP ZAR) exchange rate surged higher on Friday, spurred on by disappointing South African manufacturing data.

As the ABSA manufacturing PMI slumped further than forecast in December, plunging from 48.6 to 44.9, this undermined confidence in the domestic outlook.

With the manufacturing sector continuing to contract, having done so for seven straight months now, the appeal of the Rand naturally diminished.

This allowed the GBP ZAR exchange rate to make strong gains on Friday morning, climbing nearly 1% on the day’s opening levels, even as the mood towards the Pound remained somewhat muted.

Underlying Pound Support Limited by Political Jitters

All in all, the underlying support for the Pound is still rather limited at this juncture, as Alvin Tan, currency strategist at Societe Generale, commented:

‘Sterling is benefiting from the Dollar weakness and the growing Euro strength rather than any Pound-specific factors, which if anything have been underwhelming this week.’

After Theresa May’s anticlimactic cabinet reshuffle, and amidst fresh speculation over the possibility of a second referendum, political jitters remain a significant drag on Sterling.

Even though the NIESR gross domestic product estimate for the fourth quarter of 2017 proved better than forecast this was not enough to improve sentiment towards GBP exchange rates for long.

Looking ahead to next week, the GBP ZAR exchange rate is likely to see further volatility in response to the UK consumer price index data for December.

Investors are keen to get a fresh gauge on the state of domestic inflationary pressure, with forecasts pointing towards a slight easing from 3.1% to 3.0% on the year.

This may fail to encourage particular demand for the Pound, however, as any dip is likely to encourage the Bank of England (BoE) to leave interest rates on hold in the coming months.

While a slowdown in the rise of price pressures would be a welcome sign for consumers anything short of a significant drop will not offer much in the way of relief from the ongoing wage squeeze.

Further ZAR Exchange Rate Weakness Forecast Ahead of SARB Rate Decision

Pressure could continue to mount on the South African Rand if domestic data continues to underperform expectations.

Tuesday’s raft of mining and gold production figures may offer the Rand a rallying point, though, if output shows another strong uptick for November.

However, the key source of Rand volatility in the coming week is likely to be the South African Reserve Bank’s (SARB) latest interest rate decision.

If policymakers show any inclination to alter their monetary policy outlook the GBP ZAR exchange rate could see some sharp movement.

ZAR exchange rates also remain vulnerable to the downside due to lingering political concerns, with markets maintaining a generally bearish view in the medium-term.

As Jameel Ahmad, FXTM Global Head of Currency Strategy and Market Research, noted:

‘This is partly because of the accelerated recovery in the currency late 2017, while others might suggest that the ongoing macro outlook for South Africa does not provide much of an incentive to hold purchasing positions on the Rand, at current levels.

“With the Rand (currently) trading close to its strongest levels since mid-2015, I tend to agree with the above. However, we shouldn’t discount the possibility that an ongoing weak sentiment towards the USD in 2018, or further inspired risk appetite from traders in the global stock markets could tempt investors to ‘purchase’ into higher-yielding currencies.’

Any fresh speculation over the future of incumbent President Jacob Zuma may drive the Rand lower against its rivals once again, even after this week’s reports on the subject of an early departure proved false.

Wider market sentiment could help to buoy the GBP ZAR exchange rate further if worries over the increasingly protectionist outlook of the US flare up once again.
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