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Euro South African Rand Exchange Rate Surges as SARB Cuts SA Interest Rate

  • Euro South African Rand above 15.10 – Hits best levels in a week
  • South African Rand Steady Despite Lower Inflation – Euro fails to capitalise
  • Central Bank News: SARB Cuts SA Interest Rate – ECB hints at QE talk for autumn
  • Forecast: Eurozone PMIs Next Week – As well as South Africa unemployment

The Euro South African Rand exchange rate soared to its best levels in a week on Thursday as investors reacted to the week’s key central bank news.

Euro demand increased as European Central Bank (ECB) President Mario Draghi hinted that the bank could discuss its future plans for quantitative easing (QE) some time in the autumn. Analysts suggest this could happen as soon as September.

The South African Reserve Bank (SARB), on the other hand, unexpectedly cut South Africa’s key interest rate from 7% to 6.75%. This was the bank’s first cut in five years, and comes as inflation slips.

Earlier in the week, South Africa’s inflation print fell short of expectations. Some analysts took this to indicate the SARB would hint that a rate cut was possible soon, but markets still didn’t expect one as soon as this week.

The Euro easily capitalised South African Rand weakness towards the end of the week.

[Published 12:31 19/07/2017]

The Euro South African Rand exchange rate was little affected by Wednesday’s South African inflation results from June, as the Euro has been too weak to capitalise on Rand weakness. Both the ECB and SARB will hold policy decisions on Thursday.

EUR ZAR began this week at the level of 14.94. After slipping to its lowest level since June, 14.79, the pair has largely trended in the region of 14.90.

Euro (EUR) Limp as Investors Anticipate ECB Guidance

The Euro has been unable to hold its best levels, as investors are anxious about whether the European Central Bank (ECB) will take a hawkish, dovish or unclear tone in this week’s policy decision.

The ECB has been the primary focus for Euro traders for a few weeks now. Solid Eurozone ecostats fail to surprise or impress traders, with markets instead waiting for the ECB to hint that its aggressive quantitative easing (QE) measures had run its course and fulfilled its purpose.

This week’s Eurozone data hasn’t helped strengthen the Euro either. ZEW’s economic sentiment surveys from July fell short of expectations in all major prints, and May’s Eurozone construction output figure slipped from 3.3% to 2.6%.

Markets and analysts are simply expressing caution on the Euro this week amid uncertainty over what direction the ECB could be heading.

Recent reports from differing sources have indicated the bank could hint that it will announce an end-date for its QE scheme towards the end of the year. Others argue the bank is hesitant to announce an end-date at all and will leave policy frozen for the foreseeable future.

Carsten Brzeski, economist from ING-DiBa, explains why markets are feeling cautious and uncertain on the ECB outlook;

‘The ECB will continue to face little home-made inflationary pressure

If anything, the drop in oil prices, the pick-up in bond yields and the strengthening of the Euro have further deteriorated the ECB’s inflationary outlook.’

As a result, the Euro is likely to continue on its currently limp streak until the ECB meeting takes place on Thursday.

South African Rand (ZAR) Flat Despite Lower Inflation Stats

The South African Rand (ZAR) is facing similar market uncertainty to the Euro this week, as investors await Thursday’s monetary policy decision from the South African Reserve Bank (SARB).

However, weak performance in major currencies like the US Dollar over the last week has kept emerging market currencies like the Rand sturdy.

According to a Bloomberg report, the Rand has been the best performing emerging market currency since last week’s drop in Federal Reserve interest rate hike bets.

The Rand has been so resilient that the currency remained sturdy even after a disappointing South African inflation report on Wednesday.

South Africa’s inflation rate was expected to slip from 5.4% to 5.2% year-on-year in June but it instead dropped to 5.1%. The monthly inflation rate slipped to 0.2%, failing to hold at the forecast 0.3%.

Analysts noted that lower inflation could prove to be an obstacle for the SARB at this week’s policy decision. Rand Merchant Bank analyst Isaah Mhlanga stated;

‘A lower CPI print will make the South African Reserve Bank rate decision difficult tomorrow, especially because growth is weak and the exchange rate is also much stronger than at the last Monetary Policy Committee meeting’

As a result, investors were hesitant to make any big moves on Rand ahead of Thursday’s SARB meeting.

The Rand may have also been slightly supported by South Africa’s May retail sales stats, which beat expectations in both yearly and monthly prints.

Euro South African Rand Forecast: Central Bank Meetings Tomorrow

Unsurprisingly, Thursday will be the most vital session this week for the Euro South African Rand exchange rate.

Both the European Central Bank (ECB) and South African Reserve Bank (SARB) will be holding July monetary policy decisions. Any shifts in tone taken by the banks will inspire EUR ZAR movement for the rest of the week.

Hawkish Euro traders are hoping the ECB or ECB President Mario Draghi will hint that an end-date for the bank’s quantitative easing (QE) measures could be announced before the end of the year.

If the ECB does take a more hawkish tone, EUR ZAR will advance towards the end of the week. However, an overly cautious tone from the bank could lead to a Euro plunge.

The SARB, on the other hand, could hint that its policy easing cycle is drawing closer. This could kick-start a Rand selloff that would help EUR ZAR advance towards the end of the week. A more unclear tone from the SARB could see the Rand hold its recent strength however.

EUR ZAR Interbank Rate

At the time of writing this article, the Euro South African Rand exchange rate trended in the region of 14.90. The Rand to Euro exchange rate traded at around 0.6712.