Risk aversion has been dominating markets since the start of the week, dashing hopes that global stock markets would have an opportunity to rally in the absence of more volatile Chinese trading. However, in spite of the Euro’s safe-haven status, it has failed to fully capitalise on current trader sentiment as markets have been widely favouring the stronger US Dollar, with concerns about the economic future of Greece beginning to mount once again. With the Hellenic nation struggling to reach an agreement with creditors over controversial pensions cuts, having faced fresh anti-austerity strike action, the potential for a new crisis prompted a sharp slump of more than 5% on the Athens stock market.
Confidence in the single currency was dented further on Tuesday as a profit warning from Deutsche Bank prompted shares across the banking sector to plunge further. This wave of bearishness was exacerbated by speculation that the European Central Bank (ECB) might be inclined to move further into negative interest rate territory in response to the Bank of Japan’s (BoJ) recent policy decision. With investors concerned about the financial stability of the European banking sector in general the Euro struggled against rivals.
Narrowed German Surplus Failed to Weigh on EUR/ZAR Exchange Rate
A worse-than-expected German trade surplus, which narrowed from 20.5 billion to 18.8 billion in December, also weighed on the common currency. With the economic strength of the Eurozone’s powerhouse economy called into doubt amidst building downside risks there seemed little incentive to buy into the Euro on Tuesday. However, due to the increasing bearishness of markets, a rise in safe-haven demand helped to shore up the Euro to South African Rand exchange rate.
Sentiment towards the South African economy has been largely negative in recent weeks, as worsening drought conditions and political unrest look set to drag on domestic growth. With the strong US Dollar weighing on commodity prices the outlook of the economy seems generally muted, particularly after the World Bank warned that it was in danger of entering a recession if conditions failed to pick up imminently. Thus, in spite of the value of gold being pushed steadily up towards multi-month highs, the Rand has remained soft.
Fed Comments Prompt Fresh Euro Weakness
The appeal of the Euro dived on Wednesday, however, in response to comments from Fed Chair Janet Yellen. Although the policymaker struck a rather noncommittal stance with regards to the future of Federal Open Market Committee (FOMC) monetary policy Yellen’s failure to firmly rule out another near-term interest rate hike shored up the US Dollar, pushing the single currency lower on the probability of increasing policy divergence with the ECB. Consequently, with risk appetite recovered somewhat, the EUR/ZAR currency pair has slumped sharply.
Ahead of the weekend the Euro may weaken further if the last batch of Eurozone GDP figures prove disappointing, with expectations pointing to slowed growth in both Germany and the Eurozone as a whole. On the other hand, the Rand may equally trend lower on the back of the latest South African Manufacturing and Mining Production results. Should domestic manufacturing show signs of improvement, though, the EUR/ZAR exchange rate could continue to cede ground.