Over the past seven days the Euro to South African Rand (EUR/ZAR) exchange rate was trending within the range of 17.6760 to 18.1037.
Is the Euro Uptrend about to End?
Since the turn of the year the Euro has outperformed most of its rivals irrespective of domestic data. The appreciation was initiated by its low trade weighting, and was sustained as global economic turmoil caused heightened demand for carry trades. Last week’s most notable European ecostat was the German ZEW survey for Economic Sentiment in January which trumped expectations. This fuelled demand for the single currency, micrifying less positive domestic data results such as a bigger-than-forecast contraction in December’s German Producer Prices. Last week also saw the European Central Bank (ECB) interest rate decision which was unsurprisingly held. However, the accompanying comments from President Mario Draghi marked the start of the Euro’s fragility after he hinted at the expansion of asset purchases in March.
In stark contrast, the China-led slowdown in emerging markets saw the South African Rand soften versus the majority of its most traded currency rivals last week. However, some positive domestic data results did reduce the Rand’s depreciation. December’s inflation rate advanced to 5.2% on the year and November’s Retail Sales significantly eclipsed expectations on both an annual and monthly basis.
SARB Hike Rates and Rand Rises, Euro Cools after Eurozone Confidence Declines
On Thursday the Euro declined versus nearly all of its major peers in response to disappointing domestic data and cooling demand for carry trades. January’s Eurozone Economic Confidence, Industrial Confidence and Services Confidence all declined beyond anticipation. In addition, January’s Eurozone Business Climate Indicator failed to meet with the market consensus. Even a better-than-anticipated result for annual German inflation wasn’t enough to stoke Euro gains.
Meanwhile the South African Rand rallied across the board after the South African Reserve Bank (SARB) announced a half percentage point hike to the overnight cash rate. The Rand’s 15% depreciation against the US Dollar since the last policy meeting in November was the main driver behind the central bank’s decision to raise rates. The SARB also advanced the Prime Overdraft Rate from 9.75% to 10.25%.
Eurozone Consumer Prices to Provoke EUR/ZAR Volatility
Looking ahead, there will be a number of influential ecostats with the potential to provoke EUR/ZAR volatility. Friday will see the publication of Eurozone Consumer Prices, with a rise likely to fuel hopes that the ECB will avoid expanding stimulus in March. Friday will also see South African Trade Balance which could provoke significant movement given that the surplus has the potential to fall into deficit.
Looking further ahead, the main focus next week for those trading with the Euro will be Tuesday’s German labour market data. High unemployment in the Eurozone has long been a burden for ECB policymakers. In terms of South African data, Monday’s Barclays Manufacturing PMI has the greatest potential to provoke volatility.