Market Update – GBP / ZAR
Last week’s UK economic data was closely watched but did not produce any major surprises. The UK’s monetary policy committee voted 7-2 to keep interest rates at record lows this month according to the minutes released last Wednesday. The two dissenters were in favour of a rate hike as inflation remains well above target. There was no significant talk of further Quantitative Easing, which gave some temporary comfort to Sterling. Government borrowing was higher than expected in June, hitting £14bn compared to £13.6bn last June and £12.5bn expected. Revisions to the April/May figures meant that overall the UK is still on track to achieve the required savings in the current fiscal year. The target is to reduce borrowing to £122bn this year from £143bn last year.
UK second quarter growth came in exactly as expected on Tuesday, at 0.2%. This is less than half of the 0.5% growth achieved in the first quarter, but the markets had been bracing for a worse figure, so Sterling enjoyed a brief rally. That didn’t last though as the prevailing wind remains in the Rand’s favour. The gold price continues to post record highs on an almost daily basis, driving demand for commodity based currencies and in particular the Rand.
The South African Reserve Bank kept interest rates on hold last week at 5.5%. Inflation there is around 5% (similar to retail price inflation in the UK) but a drop in retail sales and other soft data are keeping the bank in neutral gear for the moment.
Today’s chart shows the exchange rate over the last two years. Recent price movement has been jagged and unpredictable, but longer term the trend is clearly down (i.e. for a weaker Pound) and there is no sign that the trend is reversing yet. This should signal a warning to buyers of the Rand that it may be wise to cover at least part of any Rand requirement at current levels to reduce the risk of further downside