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Pound South African Rand (GBP/ZAR) Exchange Rate Plummets as Xi Jinping Comments Boost Risk Appetite

November 22, 2019 - Written by John Cameron

Pound Sterling South African Rand (GBP/ZAR) Exchange Rate as Investors Looked for US-China Trade Progress

The Pound Sterling South African Rand (GBP/ZAR) exchange rate slumped by around -0.6% at the end of the week, leaving the pairing trading at around R18.8420.

The South African Rand rallied against the Pound on Friday despite lingering US-China trade tension as investors looked for signs of progress.

There seemed to be little reaction from markets after Chinese Premier Xi Jinping said that China wanted to work out an initial trade deal with the US, and had been doing everything to avoid a trade war.

However, he also said the country is not afraid to retaliate when necessary, and after a week of mixed signals over the likelihood of a ‘phase one’ deal this did little to move markets.

In a note to clients, Commerzbank FX and EM analyst, Hao Zhou wrote:

‘While there are many trade headlines over the past few days, one can also argue that this is actually a ‘status quo’.

‘At the end of the day, there is little progress on trade talks, and it looks like both sides are fine with another delay of the phase one deal.’

Pound (GBP) Falls as Services PMI Plummets to 40-Month Low

Sterling slumped further against the South African Rand on Friday after flash PMI readings showed the UK suffered its largest drop in UK private sector output since July 2016.

Brexit uncertainty and a fresh injection of business uncertainty caused by the announcement of the snap general election left overall business activity weaker in November.

The Pound was left under pressure as the flash services PMI slumped to a 40-month low while manufacturing slipped to a two-month low.

Commenting on this, Markit’s Chief Business Economist, Chris Williamson said:

‘With an upcoming general election adding to Brexit-related uncertainty about the outlook, it’s no surprise to see UK businesses reporting falling output and orders in November. The decline signaled by the flash PMI follows stagnation in October and adds to what has been the survey’s worst spell since the recession of 2008-9.

‘The PMI surveys are not only warning that the underlying trend in the economy is deteriorating markedly, but also that the labour market is cooling. A worsening jobs market has the potential to feed through to weaker consumer spending and slower wage growth, thereby undermining two of the key supports to the economy in recent months. The big question will be just how long can the Bank of England hold its nerve in keeping policy unchanged.’

South African Rand (ZAR) Rallies as SARB Leaves Rates Unchanged

The South African Rand rose against Sterling as the South African Reserve Bank decided to keep the repo rate unchanged.

In a close decision, SARB left rates at 6.5%, stating it wanted to see inflation expectations close to the midpoint of the target range, despite disappointing headline inflation.

Commenting on this, Nedbank analysts said:

‘A further improvement of inflation expectations would boost chances of a cut in January and this could be helped by another low headline CPI figure in December.

‘However, the proximity of the National Budget in February 2020 may prevent an early cut.’

Pound South African Rand Outlook: Will ZAR Extend Gains on US-China Optimism?

Looking ahead to next week, the South African Rand (ZAR) could continue to extend gains against the Pound (GBP) if risk appetite increases.

If there are concrete signs that the US and China are progressing towards a ‘phase one’ trade deal, the risk-sensitive Rand will rise.

Meanwhile, it is likely investors will look to political developments in the run-up to the UK December general election.

If further polls are released showing the Conservatives remain ahead of the Labour party, it is likely the Pound South African Rand (GBP/ZAR) exchange rate will remain flat if risk-appetite rises.

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