Rand Report: Rand Slides Further Amidst Dovish SARB Action
The South African Rand continued to soften last week as concerns about the local economy deter investors away from the region. Dovish monetary action has also added weight to the ZAR.
It was a relatively quiet week in the financial markets, with no major surprises regarding global data. However, there was some noteworthy data from South Africa.
In the South African Reserve Bank’s (SARB) most recent interest rate decision , it opted to raise its benchmark repo rate by 25 basis points (bps), from 7.00% to 7.25%. This rate hike was lower than the anticipated 50-bps rise, resulting in additional weakness for the Rand.
South African producer price index data was also released and came in at 13.50% for December. This is a significant reduction from the previous 15% reading and came in lower than the anticipated 14.0%. This leading indicator of price pressure suggests that inflation is cooling. The decline further supports the SARBs modest interest rate hike. Coupled with a questionable growth outlook, this data provides a rational economic justification for recent ZAR weakness.
However, Rand turbulence was partially offset by risk-on investment sentiment in the global financial markets. Risk-taking sentiment was evident in the US equity markets, with the S&P 500 and NASDAQ indices appreciating by 2.47% and 4.32% respectively. Additionally, the safe-haven US Dollar lost some ground, with the Dollar Index (DXY) shedding 0.10% and falling below 102.00. The JPY/NZD pair, a useful tool in assessing investor sentiment, dropped 0.60% in value. This collection of market movements helps to highlight the elevated preference for riskier assets at present.
However, recent risk-taking behavior was insufficient to prevent the Rand from ending in the red. Local interest rate expectations proved to be the main driver of ZAR trend. Consequently, the USD/ZAR pair rose by 0.41% from an open of R17.12 on Monday. The pair ended the week at R17.19.
GBP/ZAR rose by a comparable 0.50%. The pair ended the week at R21.31 on Friday, after kicking off at R21.23. Similarly, the EUR/ZAR pair appreciated by 0.48%. After resuming trade at R18.59 on Monday, the pair rounded off the week at R18.68.
This week, there will be an interesting round of global data. In the United States, the Fed’s interest rate decision will be released on Wednesday. Markets appear to be pricing in a fresh rate hike of 25 bps. Any surprises here will likely add volatility to the currency and broader market. The US unemployment rate data and nonfarm payrolls report will be released on Friday.
Additionally, the European Central Bank’s interest rate decision will be released on Thursday. The unemployment rate and inflation rate data will also come due for the Eurozone on Wednesday, along with updated GDP growth numbers which will be released today, 31 January.
Apart from balance of trade figures releasing today, there will be no significant data out of South Africa. Market participants will be looking to the developed-market data for insight into the position of the global financial markets.
Upcoming market events
Tuesday 31 January
EUR: GDP growth rate (Q2)
GER: Germany unemployment rate (January)
GER: Germany inflation rate (January)
AUD: Retail sales (December)
ZAR: Balance of trade (December)
Wednesday 1 February
USD: Fed interest rate decision
USD: JOLTs job openings (December)
USD: ISM manufacturing PMI (January)
EUR: Inflation rate (January)
EUR: Unemployment rate (December)
Thursday 2 February
EUR: ECB interest rate decision
Friday 3 February
US: Nonfarm payrolls (January)
USD: Unemployment rate (January)
USD: ISM non-manufacturing PMI (January)
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