Rand loses steam amidst risk sell-off

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The South African Rand (ZAR) has lost its forward momentum, after the past few weeks of bullish sentiment. Despite the release of positive South African data, the emerging market currency was unable to shake off the influence of global market factors.

The most recent US inflation data was the main disruption to the ZAR’s strength. Higher-than-anticipated inflation figures were released, as prices surged by 8.6% in May. The current inflation is rather broad-based, and upwards price pressure is now spilling over from goods into services. This is worrying for the Fed since goods inflation can be reversed by more supply, whereas services inflation may prove to be stickier.

The markets appear to be pricing in the possibility of a 75-basis-point interest rate hike by the US Federal Reserve. As a result, the US Dollar strengthened against all 19 major currency pairs. The USD/ZAR pair made a substantial move to the upside, appreciating by 1.94%. After opening at R15.60 on Monday and touching a high of R15.92, the pair ended the week at R15.83.

GBP/ZAR followed a similar, but less pronounced, trajectory. The Pound was well-supported by macroeconomic sentiment, as investors appear to be favouring developed-market currencies. Consequently, the GBP/ZAR pair appreciated by 0.53%. After opening the week’s trade at R19.41, the pair ended on Friday at R19.50.

The Rand Report: Image: Supplied

EUR/ZAR ended the week very flat, as the European Central Bank’s dovish stance on monetary policy proved to be a burden on the Euro. The ECB’s interest rate decision was released on Thursday and as expected, it did not raise rates. However, the ECB has made it extremely clear it will be raising rates by 25 basis points at its next meeting, with a likely hike in the meeting after that as well.

This week, there will be minimal impactful data from South Africa. The currency will take its cues from global central bank movements, and some additional volatility can be expected.

The US Fed interest rate decision will be released on Wednesday. Currently, the market is expecting a 50 basis-points hike. However, a further increase to the upside of 75 basis points, would likely lead to additional USD strength. We have already seen a broad-based selloff in risky assets in anticipation of the hike.

Additionally, the UK interest rate decision will be released on Thursday. The market is pricing in a hike of 25 basis points, which leads to the possibility of disappointment when compared to other central banks. We look to see the forward guidance from BoE Governor, Andrew Bailey, regarding the bank’s projections on growth and future interest rate hike.

Upcoming Market Events

Tuesday 14 June

GBP: Unemployment rate (April)

GBP: Claimant count change (May)

US: PPI (May)

Wednesday 15 June

US: Interest rate decision

US: Retail sales (May)

EUR: Balance of trade (April)

Thursday 16 June

GBP: Bank of England interest rate decision

Friday 17 June

EUR: Inflation rate (May)


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