Dovish Fed Prompts Risk-On Trading
While the week got off to something of a slow start due to the Easter long weekend the Euro to South African Rand exchange rate has since seen some marked volatility. In large part this has been due to the US Dollar and comments from Fed Chair Janet Yellen, who indicated that interest rates were not likely to rise in April. Countering the hawkishness displayed by other policymakers in recent days, this saw the ‘Greenback’ slump sharply across the board and bolstered demand for higher-risk assets.
However, the Euro strengthened somewhat on Wednesday thanks to an unexpectedly strong uptick in the German Consumer Price Index. Inflationary pressure rose from 0.0% to 0.3% on the year in March, a strong indicator that conditions are improving within the Eurozone’s powerhouse economy. Given that inflation is one of the key concerns of the European Central Bank (ECB) at present this improvement added to speculation that the central bank will not loosen monetary policy further.
Although this was enough to temporarily shore up the EUR/ZAR exchange rate the pairing soon returned to a downtrend. Markets remained in a risk-on mood thanks to a lack of strong US data encouraging the conviction that the Fed’s monetary tightening cycle has been side-lined for at least the time being. Base metal prices in particular benefitted strongly from this rally, helping to improve the outlook of the commodity-correlated currency.
Rand Strengthens as Court Ruling Weakens Zuma
The Rand was also given a sharp boost when the South African Constitutional Court ruled that President Jacob Zuma had violated the constitution by using government money to renovate his rural residence. This has been seen as a significant victory for the opposition and another step on the road to impeachment for Zuma.
While worries over political turmoil have weighed on the Rand in the past this development has seen the currency trending higher against rivals. Investors appear to be encouraged by the possibility of President Zuma’s removal from power, particularly as economic conditions within South Africa have deteriorated substantially in the last year.
German Retail Sales showed a particularly strong leap on the year in February to rise from -1.2% to 5.4% as consumer demand sharply increased. While this suggests that confidence has improved dramatically it was nevertheless not enough to prompt a EUR/ZAR exchange rate rally. A lack of safe-haven demand has been undermining the strength of the Euro this week, in spite of the particularly bearish performance of the US Dollar.
US Payrolls Predicted to Trigger Further Rand Movement
Thursday’s Eurozone Consumer Price Index demonstrated a minor uptick from -0.2% to -0.1%, in line with market expectations. Although this edges the currency union back towards positive inflation territory, however, investors remain concerned that deflationary pressure is likely to drive the figure back down in coming months.
As South Africa’s latest trade balance figures revealed far greater narrowing of the trade surplus than investors had anticipated the Rand has extended its gains further ahead of the weekend. Shrinking from -17.9 billion to just -1.07 billion Rand, this seemed to indicate that the domestic economy has largely weathered the adverse market conditions of the early year.
Friday’s US Non-Farm Payrolls report is likely to provoke renewed volatility for the EUR/ZAR exchange rate, as a stronger headline figure could prompt a resurgence in imminent Fed interest rate hike bets. Should the results disappoint, however, the Rand could be bolstered further across the board as risk appetite continues to grow.