After hitting a record high of 17.5886 in the midst of South Africa’s unprecedented finance minister shuffle, the EUR/ZAR exchange rate retreated sharply at the beginning of last week. The Rand’s recovery was largely driven by the announcement that Pravin Gordhan had been re-appointed as the nation’s finance minister, having previously served in the position from 2009 to 2014. Markets were generally reassured by Gordhan’s substantial experience in the role as well as his pledge to restore the softened currency to a stronger footing. The resultant buoyancy of the Rand helped to counteract another day of commodity price weakness, as demand for base metals remained volatile.
Despite the efforts of European Central Bank (ECB) President Mario Draghi the Euro continued to demonstrate robustness as Eurozone data offered a more positive assessment of the Eurozone’s economic strength. October Industrial Production and the December ZEW Economic Sentiment Surveys bettered forecasts, suggesting that the currency union might not be in such a fragile state of recovery as previously thought. This impression was somewhat tempered by a more disappointing round of PMIs, with the service sector showing decided weakness across the Eurozone in spite of an expansion in manufacturing output.
Traders were pleasantly surprised on Wednesday as the Eurozone’s finalised November Consumer Price Index unexpectedly showed an uptick in inflationary pressure, rising from 0.1% to 0.2% on the year. However, as this remains a far cry from the ECB’s inflation target of 2% and the monthly CPI fell into negative territory, investors were not in a particular hurry to buy back into the single currency. The Euro was equally weighed down by the impending Federal Open Market Committee (FOMC) interest rate decision, although the commodity-correlated Rand was also softened in anticipation of a more bullish US Dollar.
While the Fed voted to raise interest rates by 0.25%, the central bank’s first hike in nine years, the impact of the move was largely mitigated as a result of traders having already priced such a decision into the ‘Greenback’. Consequently the EUR/ZAR exchange rate continued to strengthen in the aftermath of the announcement, boosted by the more dovish tone taken by Fed Chair Janet Yellen with regards to the pacing of future rate moves.
Although Thursday’s South African Producer Price Index results failed to show as much improvement as investors had anticipated, climbing by 4.3% rather than 4.5% on the year, the Rand nevertheless achieved fresh strength against the Euro. An unexpected weakening of the German IFO Business Sentiment Surveys, with both the current assessment and expectations retreating in December, helped to drive the common currency down ahead of the weekend.
Monday morning has seen the Euro continue to trend down against the Rand following the inconclusive result of Sunday’s Spanish elections as Prime Minister Mariano Rajoy failed to win a parliamentary majority. With talks to form a coalition expected to take some weeks, and Greek Prime Minister Alexis Tsipras calling for the IMF to stay out of the Hellenic nation’s latest bailout, uncertainty has seen the appeal of the common currency decline.