South African Rand Loss and Sterling Weakness Contain GBP/ZAR Near 19.80

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The South African Rand fell back near to post-pandemic lows against the Dollar this week but with international factors also weighing heavily on other currencies including Sterling, GBP/ZAR has listed sideways around the 19.80 level and could continue to do so in the days ahead.

Dollar gains and Rand pains lifted USD/ZAR back above 17.0 on Wednesday but the South African currency but with other currencies also beating a retreat from the U.S. unit, other Rand exchange rates were a mixed bag of performances much like global markets.  

"While equities are showing signs of bottoming, commodities are under pressure, with WTI-grade crude down another 2.7%. WTI is back below $90 and is down about 10% on the month, which markets its 3rd consecutive month of decline. Copper is also down sharply," says Greg Anderson, global head of FX strategy at BMO Capital Markets.

"All G10 currencies have showed declines against the greenback except JPY, which is a typical risk-off pattern that matches the commodity move, but not the equity and US rates moves," Anderson and colleagues said on Wednesday.

The Rand and many other currencies were swept up in a perfect storm for risky assets in recent trade as the Dollar and U.S. bond yields advanced to new highs while a depreciation of the Renminbi also appeared to act as a further headwind for currencies of some Chinese trade partners.

Above: GBP/ZAR shown at 2-hour intervals alongside USD/GBP and USD/ZAR. Click image for closer inspection. 

"Powell did not give a clear view on whether the next FOMC meeting would see a 50bp or 75bp rate hike, and markets have left the door open for either, factoring in a 68bp lift, slightly up on a few weeks ago, but not at the full 75bp," says Annabel Bishop, chief ecnomist at Investec.

"The domestic currency is expected to still see some weakness and volatility over the remainder of this quarter. Q3.22 may see an outcome closer to R16.80/USD than R16.60/USD," Bishop adds. 

Dollar gains and losses for other currencies come after Chairman Jerome Powell suggested last Friday that the Federal Reserve is likely to lift U.S. interest rates near to 4% and hold them there "for some time" to ensure inflation falls back to the 2% target.

This is despite an economic downturn that is already underway but which is expected to grow deeper due to Fed policy.

"The most important drivers remained global factors (fears of a recession, Fed rate expectations) and above all general risk sentiment. As a result, it is likely to remain difficult for the rand to gain significant ground against the USD," says Elisabeth Andreae, an analyst at Commerzbank.

Above: GBP/ZAR shown at daily intervals alongside USD/GBP and USD/ZAR. Click image for closer inspection. 

Appetite for risky assets has been fickle since Chairman Powell's speech while the U.S. Dollar has been sought after and could continue to pose upside risks to USD/ZAR even if GBP/ZAR and others remain better contained.

"Given the upside surprise to core inflation and recent Rand depreciation, we revise our rate call for the SARB's September MPC meeting from a 50bp to 75bp hike, bringing our terminal rate forecast for 2022 to 6.75%," says Bojosi Morule, an economist at Goldman Sachs.

"As we argued recently, we think that the SARB can no longer take comfort from well-behaved core inflation and inflation expectations readings in the face of a large and persistent projected breach of the inflation target and currency depreciation pressure," Morule said of South Africa's July inflation data.

While international factors like fluctuations in global market risk appetite and the direction of the Dollar have been prominent drivers of the Rand in recent days, the domestic economy is also an important influence and one that may have turned more supportive of the currency in recent days.

This is after the South African Revenue Service said on Wednesday that the trade surplus rose to R24.76 billion during July, contrasting with expectations for a decline, and following inflation figures that led markets to wager that South African interest rates are likely to rise further than investors previously assumed.

The next major event in the calendar for the domestic economy is the release of second quarter GDP data on September 06. 

Above: GBP/ZAR shown at weekly intervals alongside USD/GBP and USD/ZAR. Click image for closer inspection.