Lack of ECB Loosening Boosted EUR/ZAR Pairing
Confidence in the South African Rand improved markedly on the back of the March inflation data, in spite of wider concerns regarding the outlook of the domestic economy. Inflationary pressure was found to have dipped from 7.0% to 6.3% on the year, an encouraging sign for investors. This improvement was also likely some relief to the South African Reserve Bank (SARB), suggesting that the central bank’s recent spate of interest rate hikes could be having the desired effect. As a result the EUR/ZAR exchange rate slumped to a four-month low of 16.0216 on Wednesday.
With markets relatively assured that the European Central Bank (ECB) would not opt to loosen monetary policy further at its April meeting the Euro soon returned to an uptrend, however. There has been an increasing doubt in the abilities of the central bank to boost inflation within the Eurozone, as well as disbelief that there is any further room for loosening.
Consequently the single currency strengthened across the board when the ECB was confirmed to have made no change to policy. ECB President Mario Draghi did attempt to talk down the Euro somewhat in his accompanying press conference, stressing the potential for interest rates to go still lower in the future. Nevertheless, in spite of a brief dip in demand, the EUR/ZAR exchange rate continued to trend strongly higher.
Sentiment towards the common currency softened somewhat ahead of the weekend with the release of the latest raft of Eurozone PMIs. Although Germany’s manufacturing sector was found to have expanded bullishly in April from 50.7 to 51.9 this was overshadowed by disappointment across the currency union as a whole. The Eurozone Manufacturing, Services and Composite PMIs all fell short of forecast for April, suggesting a further slowing of economic conditions.
Rand Rallied on Higher Gold Prices
Investor risk appetite also improved in response to persistently disappointing US data, which decreased the odds of an imminent interest rate hike from the Federal Reserve. This offered some support to the commodity-correlated Rand, although the EUR/ZAR currency pair ultimately ended the week on an uptrend around 16.1845.
Monday’s unimpressive German IFO Business Sentiment Survey failed to particularly weigh on the single currency, despite confidence among domestic businesses generally weakening. Stronger German confidence and the relative softness of the US Dollar helped to keep demand for the Euro higher, in spite of reigniting concerns over the latest round of Greek bailout talks.
The price of gold climbed higher at the start of the week as markets increasingly dismissed the chances of an imminent policy move from the Federal Open Market Committee (FOMC). With US interest rates likely to remain on hold for the near future investors were generally prompted to move towards higher-yielding assets such as the Rand.
EUR/ZAR Rate Forecast to Dip on Lower Eurozone Inflation
Should the Fed indicate a willingness to consider raising interest rates in June the Rand is likely to see a sharp slump across the board, as a stronger US Dollar would put renewed pressure on commodity prices. Greater dovishness, on the other hand, could see the EUR/ZAR exchange rate trend lower if markets adopt a heightened state of risk appetite.
If Thursday’s South African Producer Price Index also demonstrates an improvement in economic conditions the Rand could gain additional support. However, confidence in the South African economy is not likely to remain generally muted as political turmoil surrounding allegations of corruption against President Jacob Zuma deepens.
The later week could see the Euro weaken more substantially in response to the latest Consumer Price Index reports from Germany and the Eurozone. Inflationary pressure is expected to have weakened once again in April, further frustrating the efforts of the ECB to kick-start a greater recovery in the domestic economy.