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Euro South African Rand (EUR/ZAR) Exchange Rate Falls Over 1% as South African Inflation Eases

German ZEW Economic Sentiment Deteriorates Sharply in March – Euro (EUR) Exchange Rates Stumble

The Euro to South African Rand (EUR/ZAR) exchange rate fell sharply on Tuesday, contracting over 1% as markets reacted to some disappointing German ZEW readings and news that South African inflation has eased to more manageable levels.

For the bloc, the German’s ZEW headline numbers for March were the predominant drivers, plummeting to a score of 5.1, down from the previous period’s 17.8.

The Eurozone’s own ZEW economic sentiment survey similarly disappointed, this time falling from 29.3 to 13.4.

ZEW titled this release ‘Economic Outlook Worsens Considerably’, thus underlining concerns that a potential global trade conflict is limiting the bloc’s economic outlook.

Indeed, ZEW President Professor Achim Wambach noted that ‘concerns of a US-led global trade conflict have made the experts more cautious in their prognoses. The strong euro is also hampering the economic outlook for Germany, a nation reliant on exports’.

Combined, this news limited the upward potential of the single currency.

South African Inflation Rate Eases – EUR/ZAR Exchange Rate Tumbles

The South African Rand hasn’t performed too well in recent days – falling this week as markets prepared for the impending US Fed rate decision and market anxieties regarding a potential global trade war.

Despite these worries the Rand managed to claw back some of its recent losses against the Euro on Tuesday, seemingly supported by news that inflation in South Africa is easing.

According to Statistics South Africa, consumer price inflation (CPI) for the nation eased to 4.0% in February – the lowest reading since March 2015.

This result was largely driven by the South African Reserve Bank’s (SARB) policy of direct inflation targeting, and could lead to the central bank cutting its benchmark lending rate next Wednesday.

Jeffrey Schultz, Senior Econoist at BNP Paribas shared this outlook, stating:

‘Some of the more hawkish members of the committee are likely to move onto the dovish side next week. As a result, we think that there is scope for the SARB to cut by 25 basis points’.

This would traditionally weigh on the value of a currency, but markets could be hoping that the lower interest rate could reduce incentive to save and encourage investment through the cheaper borrowing costs, potentially boosting the South African economy.

It is far more likely, however, that the recovery could simply be due to market preparations before Friday’s Moody’s assessment, with markets now believing that South Africa will avoid slipping to ‘junk’ status due to positive political developments in recent months.

Euro South African Rand (EUR/ZAR) Exchange Rate Forecast: Moody’s Grading and US Rate Decision in the Spotlight

The Euro South African Rand (EUR/ZAR) exchange rate could encounter greater volatility this week as markets react to tomorrow’s US Fed rate decision, and Friday’s grading from Moody’s Investors Service.

Moody’s currently ranks South Africa one rank above junk status, with a review in progress for a downgrade.

This is important because losing ‘investment grade’ status would prevent investors from investing in South Africa, particularly via big pension funds of exchange traded funds, which are mandated to only buy high-grade debt.

As a result, a downgrade could severely hurt investment in South Africa and cause a sharp drop in the value of their currency.

Whether this will occur or not remains to be seen, however, with markets quite confident that Jacob Zuma being replaced by new President Cyril Ramaphosa could save the nation from a poorer rating.

It should also be stressed, however, that if the US Fed raises its base interest rate tomorrow then riskier commodity currencies like ZAR, AUD and NZD could plummet, as demand is siphoned to the ‘Greenback’ (USD).