Second Wave Fears Sends the Pound South African Rand (GBP/ZAR) Exchange Rate 1% Higher

June 15, 2020 - Written by John Cameron

STORY LINK Second Wave Fears Sends the Pound South African Rand (GBP/ZAR) Exchange Rate 1% Higher

Pound Sterling South African Rand (GBP/ZAR) Exchange Rate Jumps 1% on Second Wave Fears

The Pound Sterling South African Rand (GBP/ZAR) exchange rate jumped by around 1% on Monday morning. This left the pairing trading at around R21.5723.

The risk-sensitive South African Rand struggled, opening weaker on Monday as investors sold off riskier assets on fears of a second wave of the coronavirus in Beijing.

Some investors use ZAR as a proxy for emerging market risk, meaning it tends to move considerably during times of global market volatility.

Earlier in the month, the Rand benefitted from an increase in monetary and fiscal stimulus from around the world. However, downbeat comments from the US Federal Reserve last week saw investors reassess the record optimism.

In a note, Hussein Sayed, chief Market Strategist at FXTM wrote:

‘The rally, driven by monetary and fiscal stimulus, suddenly appeared on shaky grounds as if investors realised they can no longer be detached much further from economic fundamentals.

‘The resurgence of coronavirus cases in Beijing, parts of the U.S. and Japan as economies further release their lockdowns is sparking fears of a second wave, and without a vaccine in hand, the second wave could be more threatening than the first.’

Market optimism was left dented after a new coronavirus outbreak in Beijing and a growing number of cases in the United States. A smooth reopening of major economies has been questioned after the increase in cases.

Added to this, weaker than forecast industrial output data from China weighed on risk appetite as it highlights the economic damage caused by the outbreak.

Sterling (GBP) Rises Ahead of Key UK-EU Talk

The Pound was able to make significant gains against the South African Rand today due to the growing number of coronavirus infections.

However, Sterling struggled to make gains against a handful of other currencies and according to Viraj Patel, FX and global macro strategist at Arkera:

‘The Pound remains highly sensitive to changes in the external risk environment and is likely to continue trading on a corrective path lower in line with cross-asset markets.

‘The curveball provided by intensified Brexit talks today is unlikely to offset the gloomy outlook - however we expect the pound to remain sensitive to any headline Brexit risks over the coming weeks.’

Sterling investors braced themselves ahead of today’s key meeting between Prime Minister Boris Johnson and EU on post-Brexit trade negotiations.

The Prime Minister is due to join the video conference with the bloc’s leaders today, although officials have said they do not expect the current deadlock to be broken.

Britain’s Mail on Sunday reported the Prime Minister will use today’s meeting to ‘bang the table’ and press the European Union for an agreement by the end of summer.

However, officials in the bloc have noted this afternoon’s meeting is a long-scheduled stock-taking exercise rather than another round of UK-EU trade negotiations.

In a note to clients, Lars Sparresø Merklin, senior analyst, FX strategy wrote:

‘We are sceptical that the two sides will find a breakthrough in the deadlocked negotiations especially on a possible extension of the transition period, which expires at the end of the year.

‘This extension needs to be agreed upon before 1 July if the two sides should be able to extend the transition period at a later stage in the fall.’

Pound Rand Outlook: Risk Appetite and UK Unemployment in Focus Today

Looking ahead, the South African Rand (ZAR) could continue to edge lower against the Pound (GBP) if risk appetite continues to fall.

If traders continue to move away from riskier assets it will send the risk-sensitive Rand lower this week.

However, Sterling gains could be limited following the release of Tuesday’s UK unemployment and wage growth data.

If the country’s unemployment rate has jumped higher than expected in April while wage growth disappoints, rising by the lowest amount in around five years, the Pound South African Rand (GBP/ZAR) exchange rate will be left flat.

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TAGS: Pound Rand Forecasts