South African Rand Weakens Against the Pound After Emerging Market Exodus

The South African Rand weakened versus the Pound on Friday after emerging markets fell out of favour with investors, and political risks dominated the horizon.

Surprisingly high levels of growth in the US, which saw GDP Q1 results revised up to 1.4% from 1.2% on Thursday, increased US interest rate expectations and improved the outlook for the Dollar.

Since a large proportion of emerging market companies have loans from the US or denominated in Dollars, a rise in US interest rates or a stronger Dollar would make repayment of those loans more expensive, thus negatively impacting on the outlook for emerging markets.

“South Africa's rand weakened on Thursday as better than expected growth in the U.S. wobbled emerging market currencies,” said Mnfuneko Toyana and Olwethu Boso, in a Reuters report.

Capital flows had been favouring the Rand and other high interest bearing EM currencies like then Rupee with carry trade flows recently.

The 'Carry Trade' is when investors seek to profit from borrowing in a low interest rate currency and investing it in a higher interest currency.

However, the recovery in the US economic outlook started a trend in capital flowing back west at the end of the week, leading to further losses in emerging market foreign exchange values.

RMB See Global Fall in Risk as Root of Rand Malfunction

John Cairns from Rand Merchant Bank (RMB), takes a different tack, arguing the Rand’s weakness was more to do with a general fall in risk appetite (notwithstanding the positive US data), triggered by comments from the European Central Bank's Mario Draghi.

“It’s the Draghi opera that is still reverberating through global markets. Three days after his comments and markets are still reacting, with global risk assets coming under pressure and EUR/USD soaring even further yesterday. These market moves are, thankfully, a little more rational than seen mid-week: it’s a clear case of risk off, yields weakness and euro gains,” said Cairns. 

The analyst actually argue that the US data alleviated, what would have been much bigger loss for the currency.

Nor did SA domestic data provide an antidote.

“There is no silver lining on the local data front. Figures remain dreadful and have affirmed our view that the economy remained in recession in 2Q17. More worryingly, we have had to revise our full-year growth forecast down to a mere 0.3%,” says Cairns.

Despite the risk-off tenor to financial markets gold failed to capitalise even though it is a global safe haven.

This further pressured the Rand, given South Africa is a major gold exporter.

“The local gold sector fell 3.26 percent as bullion prices dropped 0.39 percent on signs that central banks may scale back their ultra-loose monetary policy pushed bond yields higher,” remarked Reuters.

Sterling Gains as Political Risk Wane

The Pound side of the pairing, meanwhile, rose on the news of Theresa May’s conservative government regaining power after successfully voting through the Queen’s Speech, but then gave back gains on continued inadequate consumption data as inflation erodes moribund earnings. 

As far as political risk for the Rand goes, the ANC’s 6-day party policy conference kicks off on Friday and promises to be a factor in shaping the economic outlook, investment outlook and the Rand.

The Rand previously adjusted lower after the ANC introduced several policies aimed at reducing racial inequality such as the ‘Mining Charter’ which seeks to redress a perceived inequality in ownership and working rights in the mining industry.

Cairns notes a mooted land distribution policy which could see the ANC discuss and implement the appropriation of land from white owners to blacks, without compensation, is unlikely to gain sufficient traction to get through, so the impact of the conference may be less than feared.

Chaotic Techs

There was little relief for investors from a technical perspective.

The chart of GBP/ZAR shows a confusing landscape which does not aid in forecasting the currency pair.

Recent rises in GBP/ZAR due to Rand weakness have been lost in a miasma of range bound fluctuations between the 16.02 – 17.22 zone (current rate 16.93). 

The current up-spurt has reached a key resistance level where it intersects with the 50 and 200 day moving averages (MA).

These are expected to exert much downwards pressure on the exchange rate and could signal the end to near-term strength.

In the longer term, GBP/ZAR is in a downtrend illustrated by the fact it is still trading below the major trendline.

As such we are neutral seeing the exchange rate carefully balanced on the technical front.