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GBP to ZAR Exchange Rate Avoids Major Losses amid Emerging Market Weakness

November 26, 2019 - Written by Ben Hughes

The latest US-China trade optimism has been unable to offer much support to trade-correlated currencies like the South African Rand that are more correlated with emerging market movement, and as a result the British Pound to South African Rand (GBP/ZAR) exchange rate has only seen limited losses today. The Pound was tumbling against most currency rivals today overall though, as investors reacted to the latest UK election polling.

It’s been a volatile couple of weeks for GBP/ZAR. Last week saw GBP/ZAR slide slightly from 18.98 to 18.88, but this week so far the pair has already recovered last week’s losses.

While GBP/ZAR has slipped from this week’s new high of 19.09, the pair has been able to sustain most of yesterday’s gains and is trending near the level of 19.02 at the time of writing.

Still, a lack of upside strength in Sterling as well as market hesitance to sell the Rand too much means that the pair may not be in for much in the way of further gains

GBP Exchange Rates Slide as UK Election Polls Show Labour Narrowing the Gap

At the beginning of the week, investors bought the Pound amid bets that Britain’s ruling Conservative Party would win next month’s general election with a comfortable majority.

This, combined with UK Prime Minister Boris Johnson’s pledge to put his Brexit plan to Parliament before Christmas, boosted hopes that Britain would avoid a no-deal Brexit and head for a relatively soft Brexit outcome.

However, yesterday’s Pound gains were short-lived, as investors reacted to fresh polls today that showed an unexpected shift.

Two polls published since yesterday have showed the opposition Labour Party slightly narrowing the Conservative Party’s strong lead. This has led to fresh political uncertainty, weakening the Pound today.

A Kantar poll, published today, showed that the Conservative lead over Labour had tumbled from 18 to 11 over the past week. It followed a separate poll published yesterday from ICM that also showed the gap narrowing.

A Conservative majority had been quite solidly priced into the Pound in recent weeks, and some analysts believe that markets had become too complacent. According to Adam Cole, Chief Currency Strategist at Royal Bank of Canada:

‘highlights somewhat complacent pricing of political risk in the UK,

It is hard to reconcile this degree of confidence with current polling results.’

ZAR Exchange Rates Weak Alongside Emerging Market Currencies

While investors remained optimistic on US-China trade relations today, these continued to benefit the safe US Dollar (USD) rather than other trade-correlated currencies.

In particular, trade-correlated currencies that also have a strong correlation to emerging market movement, like the South African Rand, were unappealing today due to market hesitance to be too risky.

According to Piotr Matys, Emerging Markets FX Strategist at Rabobank:

‘Investors are just waiting for more details before increasing their exposure to riskier assets, and definitely the Dollar in this situation is benefiting,

It's a bit of, why take the risk and trade in EM assets when you can just continue buying the Dollar.’

On top of a lack of market demand for emerging market-correlated assets, the South African Rand is unappealing amid a lack of domestic support for the currency.

While unsurprising, the International Monetary Fund (IMF) also issued fresh warnings about South Africa’s economy this week, keeping pressure on the Rand.

GBP/ZAR Exchange Rate Forecast: UK Election Polls and Trade Developments Remain in Focus

The latest UK polls surprised investors and destabilised some of the Conservative majority expectations, and any signs that polls are narrowing further could knock the Pound even lower.

As a result, Pound investors will be closely watching polls published in the coming week for further signs of shifts.

If the polls instead show the Conservative Party extending its lead again, the Pound to South African Rand exchange rate is more likely to sustain recent gains and firm.

As for the South African Rand, investors may remain hesitant to buy the currency too much unless there is a little less uncertainty over US-China trade hopes.

Strong South African data could also boost ZAR support. South African business confidence data due tomorrow could help knock the Pound to South African Rand exchange rate lower again if it impresses investors.
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