EUR/ZAR Exchange Rate Shoots Higher on Fears of Disappointing Budget

Risk-averse markets are driving the Euro South African Rand exchange rate higher today.

The interbank EUR ZAR has climbed 1.1% to 16.1877.

Spanish Government Moves to Remove Catalonia’s Autonomy; EUR ZAR Climbs

The Euro has been able to make strong gains versus the South African Rand – and elsewhere against many of its peers – even though the Catalan crisis has deepened further.

The Spanish government has received cross-party support to dissolve the Catalonian parliament and hold new elections in January in an attempt to unwind the region’s bid for independence.

Regional President Carles Puigdemont had declared independence, then stated that this would be suspended to allow negotiations.

Madrid used the lack of clarity here to invoke Article 155 of the constitution, which allows the central government to take any steps necessary to restore stable government to an autonomous region.

Spain is the Eurozone’s fourth-largest economy, behind Germany, France and Italy and Catalonia contributes around a fifth of the nation’s GDP, receives over half of its start-up business investment and enjoys an unemployment rate that is less-than-half the national level.

The separation of Catalonia would therefore have had devastating consequences so, despite the fact the Spanish government’s move could lead to civil unrest in the region, markets are largely relieved by the potential for the nation to remain united.

Rand Slumps on Market Expectations of Disappointing Budget from New Finance Minister

The South African Rand has suffered today as markets prepare for the first medium-term budget from new Finance Minister Malusi Gigaba.

Economists expect that deficit projections will be raised from 3% of GDP to over 4%, thanks to a shortfall in revenue that could be up to R60 billion, due to weak growth and a decline in tax compliance.

Confidence in Gigaba does not seem to be running particularly high, with analysts expecting little change in this budget ahead of the main budget due for February.

This is partly because they believe politically he will be unable to make the necessary changes to tax and spending to avoid South Africa’s local currency rating being downgraded by the middle of next year.

All Eyes on ECB Meeting as Markets Anticipate QE Tapering

There is plenty of Eurozone data on the economic calendar for the coming week, but the focus will be on Thursday’s European Central Bank (ECB) monetary policy meeting.

The Governing Council is largely expected to announce the tapering of the quantitative easing programme, curbing the amount of monthly asset purchases.

ECB President Mario Draghi has already stated that interest rates won’t rise until the bank has exited the asset purchase programme, so tapering is the first step towards paving the way for rate hikes, which would fuel Euro demand.

If the pace of tapering is slower than markets currently expect, or if the ECB decides not to adjust QE at this juncture, the Euro is likely to tumble.

The South African data calendar is virtually empty next week, with the only ecostats due out being the producer price indices for September, released on Thursday.

On the month price growth is expected to have picked up from 0.4% to 0.5%, while year-on-year growth is projected to accelerate from 4.2% to 5.4%.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon