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European Central Bank’s (ECB) Interest Rate Freeze Causes Euro to South African Rand Exchange Rate Jump

Euro to South African Rand Exchange Rate Gains on ECB and Moody’s Jitters

Demand for the South African Rand (ZAR) had already been weak ahead of the European Central Bank’s (ECB) July policy decision today, so the less dovish than expected decision made it easier for the Euro to South African Rand (EUR/ZAR) exchange rate to gain.

The recently rallying Rand continued to push EUR/ZAR lower since markets opened at the level of 15.63 this week, and this morning saw EUR/ZAR briefly touch on a five month low of 15.43 before it rebounded.

The South African Rand weakened slightly this morning, and EUR/ZAR gains extended this afternoon as the Euro (EUR) advanced. At the time of writing, EUR/ZAR was trending above the week’s opening levels, near the level of 15.67.

Investors found the Euro more appealing following the European Central Bank policy decision. However, today’s Euro to South African Rand (EUR/ZAR) exchange rate gains may be temporary as investors await next week’s major Eurozone growth and inflation data.

Euro (EUR) Exchange Rates Climb as European Central Bank’s (ECB) Draghi Avoids Dovish Shifts

Following weeks of speculation that the European Central Bank (ECB) could ease Eurozone monetary policy imminently, as well as concerning slews of disappointing Eurozone manufacturing data – especially from Germany – the ECB held its anticipated July policy decision today.

Bets had been edging higher that the European Central Bank could cut Eurozone interest rates as soon as today’s policy decision, and investor expectations for the bank’s tone grew more and more dovish as the decision approached.

As a result, news that the ECB left rates frozen and that President Mario Draghi had sounded notably less dovish than speculation suggested led to a rebound in Euro demand.

According to Esther Maria Reichelt, Strategist at Commerzbank Frankfurt:

‘Draghi wasn’t sufficiently gloomy enough to warrant more easing than what markets are expecting in September. On the contrary, he is pointing at more pockets of strength in the economy such as labour and services and that is causing this rebound in Euro and bond yields,’

Due to Draghi’s slightly less dovish tone, interest rate cut bets slipped too. Still, bets of a 10 basis point cut in September are still high.

South African Rand (ZAR) Exchange Rates Fall from Highs on Credit Rating Fears

The South African Rand has been climbing in recent weeks, despite concerns about South Africa’s economic outlook. This has been largely due to weakness in rivals, including the Euro, as well as the Rand’s high yields as major Central Banks cut interest rates.

The Rand’s appeal as a high yielding currency has not helped it to hold its best levels though, as concerns about South Africa’s economic outlook continued to mount.

South Africa’s government has announced additional funding for embattled state-owned energy firm, Eskom. The news briefly bolstered market hopes about the economy, but fresh comments from Moody’s have weighed on that optimism.

As one of the major credit rating agencies, comments from Moody’s that the Eskom funding plans were ‘credit negative’ caused concern about South Africa’s economy to worsen.

According to Moody’s:

‘The lack of a strategy to return Eskom to more stable financial situation that would reduce the need for government support exacerbates the problem for the government,’

As Moody’s is the only major ratings company that still assesses South Africa with an investment grade, the news concerned investors and finally caused the recently rallying Rand to tumble.

Euro to South African Rand (EUR/ZAR) Exchange Rate May Become More Volatile

As the South African Rand is sold back from its best levels, various domestic and global factors could influence the Rand’s movement and make it more difficult to EUR/ZAR to see a solid recovery.

The South African Rand is a currency that is often correlated to shifts in global trade sentiment and risk-sentiment.

As a result, if US trade relations show signs of improvement, this could bolster Rand demand.

However, the South African Rand could remain weak on concerns over South Africa’s domestic government and economic outlook, which would make it easier for the Euro to sustain some of its recovery.

Tomorrow’s German import prices and French consumer confidence data could cause some Euro movement, but Euro investors may overlook these fairly low-influence stats to keep digesting European Central Bank (ECB) news and anticipate major data due next week.

Next Wednesday will see the publication of Eurozone growth and inflation stats, which could be highly influential for the ECB outlook and the Euro to South African Rand (EUR/ZAR) exchange rate outlook.