The Sterling-Rand Rate Climbs on Brexit Hopes and Market Risk-Aversion

May 18, 2018 - Written by Minesh Chaudhari

STORY LINK The Sterling-Rand Rate Climbs on Brexit Hopes and Market Risk-Aversion

Concerns about the Brexit process, as well as disappointment in Britain’s economic outlook, did little to stop the British Pound to South African Rand (GBP/ZAR) exchange rate from climbing this week. Instead, broad risk-aversion has weakened the Rand and helped the Pound to recover most of its recent losses against the Rand.

Last week saw GBP/ZAR tumble from 16.89 to 16.59 as Sterling was pressured by Bank of England (BoE) news and the Rand climbed on a brief risk-rally. However, this week has seen GBP/ZAR surge. On Friday, GBP/ZAR touched a high of 17.13 and the pair trended near that level at the time of writing.

GBP Strengthens on Post-Brexit Customs Union Hopes

This week has seen Brexit speculation hit headlines once again. This time, the topic is Britain’s continued membership of the EU customs union post-Brexit.

The UK government has repeatedly stated over the past year that Britain will be leaving the EU customs union following Brexit, but this week speculation has flared up that the government could be planning to remain in a customs union after all.

Reports emerged suggesting that the UK government planned to keep the nation in a new EU customs union beyond the end of the Brexit process.

Then towards the end of the week, another report claimed that the government’s cabinet had agreed to a proposed ‘backstop’, which would see the UK match EU tariffs post-Brexit in order to keep a soft border in Ireland.

This backstop would only be necessary if the UK does not reach a more bespoke customs agreement with the EU – which the government is still optimistic is possible.

However, UK Prime Minister Theresa May has also reasserted that the UK will be leaving the EU customs union following Brexit. As a result, the customs union speculation has only given a limited boost to Pound demand.

Analysts argue that until there is more concrete evidence or confirmation that the UK will remain in a customs union, there is little reason for investors to pile into Sterling.

Brexit uncertainties and underwhelming UK data in recent weeks have kept Bank of England (BoE) interest rate hike bets falling too, which is further limiting Pound demand.

In the last two months alone, markets have gone from betting on two BoE rate hikes in 2018, to none until 2019.

ZAR Fails to Capitalise on Brief Risk-Rally

The South African Rand has been unable to hold its ground against the Pound this week, as broad strength in the US Dollar (USD) has kept risky emerging market currencies like the Rand unappealing.

While South Africa’s latest domestic data has been decent, influential global factors continue to put pressure on Rand trade.

Concerns that trade talks between the US and China could fall through and lead to a global trade war have made investors hesitant to take risks by buying emerging market currencies.

On top of this, prices of oil have seen impressively strong performance in the past week. South Africa’s economy typically benefits from lower oil prices, so this has dragged on Rand demand too.

South Africa’s retail sales results beat expectations in March, coming in at 4.8% rather than the predicted 4.4%. This was not able to prevent GBP/ZAR advances however.

GBP/ZAR Forecast: UK and SA Inflation Results in Focus

While analysts predict that the South African Rand will eventually recover from its US Dollar-influenced losses, the currency could continue to weaken for now.

If US Dollar demand remains strong and global trade uncertainties continue to hit headlines, the South African Rand will remain unappealing to investors.

Still, the currency could see some domestic support in the coming week depending on the results of major upcoming datasets.

Wednesday will see the publication of South Africa’s April Consumer Price Index (CPI) report, followed on Thursday by the South African Reserve Bank’s (SARB) May policy decision.

If none of this news influences Rand trade however, the Pound to Rand exchange rate is more likely to be driven by next week’s major UK ecostats.

Next week’s most influential data for GBP/ZAR will likely be Britain’s April inflation rate, also due on Wednesday. Thursday’s UK retail data and Friday’s UK growth projections may also influence the Pound to Rand exchange rate next week.

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TAGS: Pound Rand Forecasts