South African Rand Slide Leads GBP/ZAR Higher into Key Risk Events

Modified: Tuesday, 08 August 2023 13:53 BST
Written by: James Skinner

GBP/ZAR rally puts mid-June highs in sight
As USD rises in risk averse global markets
China trade data warns on global economy
SA industry data, U.S. CPI, UK GDP eyed

The South African Rand’s deepening losses led GBP/ZAR to test an important level of technical support on the charts early in the new week but local industrial data and U.S. inflation figures are among the factors that could yet hamper, halt or perhaps even reverse the rally in the latter half of the week.

South Africa’s Rand fell back toward July lows against the Dollar, Pound and Euro on Tuesday as stock indices sold off around the world and government bond markets rallied with many analysts citing international trade figures from China where exports were reported to have fallen faster than imports for the month of June.

“It was a bad day for the rand yesterday, trading as high as 18,7500 in the New York session from an opening level of around 18,4800. The Northern Hemisphere summer holiday markets appear to be in full swing already, with markets thin and illiquid,” says Walter de Wet, a fixed income and currency strategist at Nedbank.

“Moody’s lowering credit ratings for 10 small and mid-size US banks also partially impacted sentiment, with the rating agency saying it may downgrade major lenders, while Federal Reserve Governor Michelle Bowman talked up the need for further hikes. Asia Pacific markets are mixed this morning, as China’s July trade came in lower,” he adds.

China’s almost evenly split between import and export declines could be indicative of the extent to which the global economy has slowed this year and as far as it is, the picture would be even bleaker if adjusted to account for a 5.5% June increase in U.S. imports adding notably to the China export number.

Above: Pound to Rand rate shown at daily intervals with Fibonacci retracements of July fall indicating possible areas of technical resistance for Sterling.

High inflation, monetary tightening by central banks and resulting falls in real terms incomes would be the most obvious explanations for any downturn in the global economy.

“The trade balance, a vital indicator of a country's economic health, showed a notable turnaround. In June, the balance shifted from a previous surplus of ZAR 9.6 billion to a deficit of ZAR -3.54 billion,” says Sebastian Steyne, an FX risk and hedging specialist at Sable International, in reference to last week’s South African trade data.

“After the astonishing weakness in the ZAR, the currency has flipped over to quite undervalued. This weakness was expected, since the currency had been the best performer across the board for two consecutive prior weeks,” Steyne writes in a Monday market commentary.

Rand losses over the fortnight to Tuesday have reversed more than half of the currency’s rally since late in May and pushed it deeper into the realm of undervaluation but might risk falling further on Thursday if the May month decline in mining and manufacturing output is reported to have extended in June when official data is released.

Any extended rally in USD/ZAR and positively correlated pairs like GBP/ZAR might be offset, however, if a widely expected fall in U.S. inflation does not materialise on Thursday.

“The US engine of growth is definitely not super strong by any stretch and although everyone thinks we are either soft landing or no recession at all, that isn't actually a done deal yet, so we are in a tricky situation where the US data probably matters most to the broader macro outlook,” says Brad Bechtel, global head of FX at Jefferies.

Above: GBP/ZAR at weekly intervals with USD/ZAR and selected moving averages.

Any undershoot of economist forecasts for the U.S. inflation would potentially act as a headwind for the U.S. Dollar in broad t, which would typically be negative for exchange rates like USD/ZAR and GBP/ZAR, though much about the latter also depends on the UK GDP data due out this Friday.

The economist consensus is for GDP to have grown 0.2% in June to sit unchanged for the second quarter with this zero growth outcome following a 0.1% increase previously, which would leave the economy in a potentially precarious position as the impact of the rising Bank of England (BoE) Bank Rate is increasingly felt.

However, some economists disagree and cite a range of factors as reasons why the economy could yet escape a downturn a while longer including a greater number of working days in the previous quarter and the scheduled passthrough to households of earlier declines in wholesale energy prices.

“The headwind to aggregate disposable incomes from mortgage refinancing will get only slightly more intense in the second half of this year. Surveys also show that businesses’ investment intentions are holding up well, despite the surge in the cost of borrowing,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

“Meanwhile, most unions representing public sector workers have accepted revised pay offers from the government, which should enable output in the public sector to recover in Q3, boosting quarter-on-quarter growth in GDP by about 0.15pp,” he adds in a Tuesday research briefing.

Above: GBP/ZAR at monthly intervals with Fibonacci retracements of 2015 fall indicating possible areas of technical resistance for Sterling.