By Jon Beddell
Foreign Currency Market Update – GBP / ZAR Update
As the UK effectively ground to a halt over the last two weeks the celebrations were notably absent from the markets as Sterling continued to slide against most of its counterparts.
Last week’s main event (aside from the wedding) was the announcement of first quarter GDP, which came in at 0.5%, exactly in line with estimates. Sterling rallied momentarily but soon resumed the general weak tone. Interest rate expectations have been scaled back over recent weeks as a slight moderation in inflation, and the uninspiring growth data keep the Bank of England split on direction. With the tightening cycle already well underway in other parts of the world, and now starting to bite in Europe, for Sterling it’s a case of always the bridesmaid and never the bride. For South Africa’s part, the cycle is still down, with the last rate cut being October 2010. However, rates at 5.5% are still highly attractive compared to the 0.5% yield offered by Sterling.
The pound was already starting from a loose footing in London this morning, so a weak manufacturing report was all the excuse it needed to head lower. The Purchasing Managers Index for Manufacturing came in at 54.6, well below the 57.5 reading expected, emphasising the fragility of the recovery and giving the BoE yet more ammunition to do nothing at Thursday’s monetary policy meeting.
A surprise trade surplus for March helped the Rand last week. The surplus was 971m Rand compared to expectations of an 800m deficit. In data released today though, the jobless rate increased to 25% in the first quarter from 24% in the three months to December. Annual growth of 7% is needed to hit the government’s 15% jobless target by 2020. However, the administration predicts just 3.4% growth this year.
This week’s data calendar will be dominated by house price surveys from Halifax and Nationwide tomorrow, followed by the interest rate decision on Thursday.
The technical outlook is negative. Sterling has made several failed attempts to rally over the last three months, and has now given back half of the gains made in the January rally. Momentum is negative, and we believe the risks lie to the downside. Clients with Rand requirements should consider hedging their exposure now.