Decreasing Odds of Fed Rate Hike Boosted Rand
Ahead of the weekend the EUR/ZAR exchange rate saw a substantial slump as the latest US Non-Farm Payrolls report prompted a surge in risk appetite. Although the headline figure showed a strong increase this was tempered by disappointing wage growth, encouraging speculation that the Fed will leave interest rates on hold for longer. As a result the appeal of higher-risk assets such as the Rand increased dramatically, to the detriment of the softening Euro.
Demand for the Rand continued to build this week on the back of a greater than expected expansion of South Africa’s Foreign Exchange Reserves. In February domestic reserves increased from $45.12 billion to $45.75 billion, an encouraging sign for investors who have struggled to find strong incentive to buy into the emerging-market currency in recent months.
While January’s German Factory Orders demonstrated an unexpectedly strong recovery on the year, climbing from -2.2% to 1.1%, the Euro struggled to regain ground against rivals on Monday. This sharp increase in demand certainly indicates that the Eurozone’s powerhouse economy remained on stronger form at the beginning of the year, in spite of increased market turbulence and slowdown worries.
Nevertheless, with traders’ risk appetite still heightened this stronger showing failed to sufficiently shore up the single currency. The latest Eurozone Sentix Investor Confidence Index compounded this bearish trend further, defying forecasts to slip from 6.0 to 5.5 rather than climbing as pundits had anticipated. Consequently the EUR/ZAR currency pair slipped lower, hitting a two-week low of 16.7799.
Weak Chinese Trade Figures Dented Rand Demand
The Rand was unable to hold onto these gains on Tuesday, however, as the latest raft of Chinese trade data proved worse than expected. Exports shrank by a discouraging -25.4% in February, with imports remaining firmly in contraction territory as well. This reminder of the still fragile state of the world’s second largest economy saw markets rapidly return to a risk-off mentality, driving the emerging-market currency down across the board.
This downtrend accelerated in response to a disappointing widening in the fourth quarter South African Current Account, which undid most of the optimism prompted by Monday’s stronger data. Increasing political turmoil and persistent drought conditions have been weighing heavily on the domestic economy in recent months, dragging the Rand back as confidence falters.
Moody’s to Reconsider South African Credit Rating
Fresh incentive to sell out of the Rand came on Wednesday after Moody’s decided to place South Africa’s credit rating on review for a downgrade, with concerns cited over weakening growth outlook and bearish economic performance. With sentiment already fragile this move did little to support the volatile currency.
In spite of this rather dispiriting development the EUR/ZAR exchange rate has remained in a slump as the Euro softens in anticipation of Thursday’s European Central Bank (ECB) policy meeting. While a stronger fourth quarter Eurozone GDP had encouraged speculation that policymakers may dial back plans on monetary loosening markets seem confident that President Mario Draghi will ultimately deliver.
Providing that the ECB opts to expand its current easing program the common currency is expected to trend lower across the board. While January’s South African production data is expected to be a mixed bag the Rand may fall further out of favour with traders if the outlook of the domestic economy continues to worsen.