Political concerns have weighed heavily on the Euro since the start of the week, with investors jittery over the potential results of the Dutch election. Although far-right candidate Geert Wilders was seen to be falling back in the polls the prospect of another populist surprise could not be so readily ruled out. The future of the currency union could be thrown into doubt if there is a significant swing in support towards the right, particularly as the French presidential race remains tight.
The single currency weakened in response to the news that the centre-right presidential candidate François Fillon had been placed under formal investigation for misuse of public funds. This reduced Fillion’s chances of passing into the second round of voting, leaving the field open for National Front leader Marine Le Pen. Although the centrist Emmanuel Macron is still expected to prevail over Le Pen the Euro was nevertheless discouraged by the development.
Rand Boosted by Rising South African Production
Demand for the Rand strengthened on Tuesday as a result of a moderate rebound in mining and manufacturing production. Although the improvement was not enough to fully recover from the earlier contraction markets were pleased to see some signs of strength within the economy. A general mood of risk appetite also weighed on the EUR ZAR exchange rate, with higher-yielding currencies in greater demand in spite of the certainty of an imminent Federal Reserve interest rate hike.
Confidence in the South African economy soon deteriorated, however, after January’s retail sales figures proved disappointing. Rather than showing growth of 1.2% on the month sales were instead found to have slumped -2.3%. This did not paint a particularly positive picture of the economic outlook, suggesting that consumers started the year on a less-than-confident footing. Even so, the relative weakness of the Euro prevented the EUR ZAR exchange rate from capitalising on this weaker showing.
Dutch Election Results to Provoke Further Euro Volatility
If the Fed proves to more hawkish in tone in its latest policy guidance this could weigh heavily on the risk-sensitive Rand. A more rapid pace of monetary tightening would encourage greater US Dollar bullishness, which would have a negative impact on metal prices and market sentiment. On the other hand, indications that policymakers are likely to take a more cautious approach to further interest rate hikes could give the Rand a fresh boost against the Euro.
As the outcome of the Dutch election becomes clear EUR exchange rates are expected to experience greater volatility. Providing that Wilders does not attract strong levels of support in the final vote the single currency could rally strongly across the board. While the risk of populist, Eurosceptic parties winning through in the French and German elections will remain a source of uncertainty and Euro softness for the foreseeable future.
Ahead of the weekend the EUR ZAR exchange rate could also come under pressure in response to January’s Eurozone trade balance report. Forecasts point towards the trade surplus having narrowed from 24.5 billion to 22.0 billion at the start of the year, suggesting that the economy remains in a less robust state. If the figure surprises to the upside, though, the single currency may see an increase in demand.