The South African rand has been the most volatile emerging market currency this year and the GBP/ZAR recent fluctuations have been reflective of this. The appreciation of the rand in the past three months has been largely thanks to the return of risk appetite, which is attributable to growing confidence in the global economic recovery. This confidence has faltered of late but should be a prominent feature looking forward.
After reaching a high of 11.80 in mid-February, the GBP/ZAR declined to its current trading level of 11.16.
The rate would be lower but for the recent period of risk aversion triggered by concerns that Greece will need to restructure its debt. These peripheral debt fears coincided with a slump in the commodity markets, which has seen the price of gold from $1,540/oz to under 1500/oz in the past fortnight. South Africa is a major exporter of precious metals and other raw materials and its economy benefits greatly from higher prices, and its depreciation is a logical consequence of commodity slides.
Risk appetite is slowly but surely returning at present and based on the premise that eurozone leaders are able to hammer out some sort of palatable solution to the Greek debt situation in the near future, the rand should be able to regain ground lost in recent sessions. Of course, a bounce in commodity is important as well, but even with the recent slide in mind, commodity prices remain at elevated levels. Rand investors will hope the recent commodity decline is a correction, rather than a genuine change in trend.
Central bank policy has been a major driver of the currency markets this year, and the South African Reserve Bank (SARB) boasts a 5.5% interest rate, which compares very favourably with the Bank of England’s 0.5% base rate. So when confidence is high as it has been for long periods this year, we have seen and will continue to see investors chase higher-yielding currencies such as the rand.
However with the bank having kept rates on hold at its last meeting, the market is somewhat pessimistic as to further SARB monetary tightening in the near and medium-term, which could limit the rand’s appeal somewhat moving forward. In addition, South African headline inflation hit 4.2% last month, which was below expectations of 4.4% and well within the official 3-6% target. South African growth prospects have also been downgraded of late as its recovery slows up, with high unemployment a particular issue.
Market sentiment towards the UK economy has weighed on sterling in recent months and with few signs of near-term improvement on this front, sterling is likely to remain out of favour for months to come. Despite high UK inflation up at 4.5%, the MPC is reluctant to impose stricter lending costs on the British economy with when a double dip recession is such a genuine threat.
Sterling look set to underperform for several months to come and based on the assumption that risk appetite will return with a good degree of strength and commodities do not suffer another major decline, we see sterling weakening against the rand in the near-term. One important factor will be the behaviour of the SARB in the spot markets; the central bank has attempted to limit the rand’s appreciation by buying up foreign exchange. This sort of intervention all but rules out any extreme decline in the GBP/ZAR pair. Nevertheless, GBP/ZAR may head down towards 11.00 and possibly below this benchmark before the prospect of BoE rate hikes gives sterling a boost.
Richard Driver
Analyst – Caxton FX
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