The approach of key German inflation data has failed to push the EUR/ZAR exchange rate below opening levels this morning, with the pairing instead recording strong growth as a busy South African data calendar depresses appetite for the Rand.
Strong German labour market data for March has also helped support the Euro this morning, after the latest unemployment change figure showed a larger-than-expected 19,000 decline in the number of jobless.
Economists had pencilled in a drop of 15,000, with a greater-than-expected fall partly thanks to a revision to the previous month’s drop, taking the total to 23,000.
As expected, the unemployment claims rate fell from 5.4% to 5.3%.
The solid figures have allowed the Euro to hold gains of around 0.3% versus the South African Rand, with further appreciation prevented by the important upcoming German consumer price index figures later today.
Approach of Further Domestic Data Weakens South African Rand; EUR/ZAR Exchange Rate Climbs as Markets Await PPI and Trade Balance
South Africa’s economic data calendar is unusually busy today, helping the EUR/ZAR exchange rate to record strong gains as appetite for the high-risk South African Rand remains muted ahead of this afternoon’s releases.
Markets have been further dissuaded from buying into the Rand due to weak private sector credit growth figures, which showed only a small acceleration in the pace of business borrowing year-on-year during February.
Private credit growth grew from 5.54% to 7.74%, disappointing forecasts for a rise to 6.2%, suggesting businesses are not investing as heavily in growth as had been expected. This could have knock-on effects for wages, unemployment and inflation.
The inflation outlook has been further complicated by the latest M3 money supply figure, which is the broadest measure of Rand coins, notes and denominated assets such as bonds, in circulation.
The money supply grew 6.89% year-on-year to February, up from an annualised 5.83% in January and significantly higher than the 6.3% forecast.
This suggests that there is still a significant amount of money in circulation, which will weaken the spending power of the South African Rand and therefore could push consumer prices higher.
The South African Reserve Bank (SARB) has recently begun loosening its monetary policy, cutting interest rates as inflation returns towards the centre of its target range.
However, today’s data suggests that inflation could rise again, meaning SARB could be forced to row back on its recent policy adjustments.
While rate hikes are usually positive for a currency, in the case of the South African Rand investors may choose to focus on the outlook for the economy if prices continue to surge, with weakening consumer spending power taking precedent.
EUR/ZAR Exchange Rate Forecast to Hold Current Gains after Release of German Consumer Price Index Figures
Today’s release of German consumer price index figures is unlikely to give the EUR/ZAR exchange rate a boost, assuming the data prints in-line with forecasts.
While year-on-year preliminary estimates for price growth are expected to show an acceleration from 1.4% to 1.7%, month-on-month growth is expected to hold steady at 0.5%.
The unchanging pace of inflation in the Eurozone’s powerhouse economy is unlikely to be viewed as a positive sign by markets, who are still awaiting solid evidence of an uptick in consumer prices.
If the data prints in-line with forecasts, the EUR/ZAR exchange rate may at least manage to hold this morning’s gains, with weakness in the Rand preventing the Euro from falling, but it would likely take a surprise uptick in the month-on-month inflation rate for the Euro to press higher.
Of course, there is potential for further EUR/ZAR gains if today’s South African data disappoints.
The balance of trade for February is expected to show a much smaller deficit of -ZAR5.7 billion, after the tumble to -ZAR27.7 billion seen in January.
Although this represents a significant reduction in the shortfall, such an improvement may not be sufficient to boost demand for the South African Rand, given just two months prior to this the nation was running a trade surplus.