Can't help with the smoke, probably oil leaked (or leaking) onto the exhaust system, but the most common source of a bouncing speedo is not the cable, although that does happen, but the speedo drive gear loose on the output shaft of the transfer case.
This gear is only held by the clamping action of the nut on the end of the shaft, and only needs to be very slightly loose to allow it to slip. Disconnect the front of the rear prop shaft to access this nut. Not sure whether it is nyloc or split pin on S3.
John
John
JDNSW
1986 110 County 3.9 diesel
1970 2a 109 2.25 petrol
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