Although Eurozone data has proven largely positive this week, the EUR ZAR exchange rate has struggled to escape a downtrend. Investors have remained somewhat preoccupied with worries over the political outlook of the currency union, particularly amid speculation that Italy could be facing an early election. While there was no resurgence in concerns of the Italian banking sector collapsing, the underlying fear continued to weigh on the single currency, and likely will do until the matter is completely put to bed.
Demand for the Rand, on the other hand, strengthened on the back of increased market risk appetite. Hopes of greater infrastructure investment in the US kept metal prices on a stronger footing, to the benefit of the commodity-correlated currency.
Euro Shored up by Rising Eurozone Inflation
Confidence in the Euro was supported by an unexpectedly strong Eurozone Consumer Price Index, which rose from 0.6% to 1.1% in December. This stronger showing encouraged speculation that the European Central Bank (ECB) could adopt a more hawkish view of monetary policy, suggesting an earlier tapering of the quantitative easing program. Even though inflationary pressure is unlikely to reach the ECB’s 2% target in the near future this improvement nevertheless boosted the EUR ZAR exchange rate.
The hawkishness of the Federal Open Market Committee’s (FOMC) December meeting minutes saw risk sentiment weaken on Thursday, raising the prospect of a faster pace of monetary tightening. With commodity prices slipping back the Rand was unable to hold onto its earlier strength, despite a better-than-expected Standard Bank PMI. Given the less-than-encouraging nature of the South African economy at present, with further political turmoil likely, the underlying bias of the Rand remained to the downside.
Robust German Retail Sales Expected to Boost EUR ZAR
Ahead of the weekend the EUR ZAR exchange rate could falter once again if November’s German factory orders figures prove discouraging. Forecasts point towards a -2.5% contraction in orders on the month, something which would undermine confidence in the health of the Eurozone’s powerhouse economy. A weaker result here would indicate a weakening in demand and suggest that spending within the German economy has faltered.
However, the corresponding retail sales data could prevent the Euro from suffering a fresh downtrend. As much of Germany’s recent economic growth has been the result of increase consumer spending an uptick in retail sales could precede a further improvement in domestic activity. So long as consumer confidence remains high the EUR ZAR exchange rate could regain further ground, although any fresh political developments could limit the upside potential of the single currency.
Volatility could be in store for the Rand thanks to the latest US Non-Farm Payrolls report, which could prompt another surge in risk-on trading. Investors expect to see a modest increase in the unemployment rate for December, even if a fair number of new jobs are added to the economy. While a disappointment here is unlikely to prompt the Fed to rethink its policy outlook it could still offer a boost to the Rand, with the US Dollar expected to soften in response to any signs of a weaker labour market.