Strong euro spells rand volatility
• Currency set for bumpy ride as banks shed accommodative policies
The surging euro has caught markets unaware with increased volatility set to become the norm as global central banks increasingly walk away from accommodative interest rate policies.
The surging euro has caught markets unaware with increased volatility set to become the norm as global central banks increasingly walk away from accommodative interest rate policies.
That promises only one thing for the rand, says Investec chief economist Annabel Bishop. “And that is greater volatility.”
While the rand continues to gain on the dollar, up 5.5% so far in 2017, it has been affected by the stronger euro, losing 4.5% against the European currency in 2017.
So far, the surge in the euro remains intact, but it may only be temporary. JPMorgan has warned the dollar will rebound later in 2017, based on higher inflation in the US and possible interest rate increases.
If JPMorgan is correct, the rand could weaken in the months ahead as the currency usually trades inversely to the dollar. “A faster normalisation of global interest rates would erode the global risk-on sentiment, likely to the point of riskoff, which could see rand weakness,” Bishop said.
The euro firmed to $1.1670 last week from $1.034 in January, despite the European Central Bank sending out a dovish view at its meeting, at which rates were kept unchanged.
“The euro surged despite the bank not revealing any further guidance for its September meeting,” said TreasuryOne’s Gerard van der Westhuizen.
After being the world’s sick currency in 2015 and 2016, and with the dollar set to break through $1 to the euro, the euro has performed a remarkable comeback, gaining 10.5% against the dollar in 2017. Driving the market is the view that the central bank will start scaling down its accommodative lowinterest and asset-buying policy later in the year.
With the tapering process stalling in the US on mild inflationary data and increasingly dovish views from the US Federal Reserve, the attention has shifted to Europe, where German Chancellor Angela Merkel has described the euro as “grossly undervalued”.
With a massive surplus on its current account, Germany has some vested interests in supporting a firmer currency as it could shrink exports. And with the tail wagging the dog, central bank president Mario Draghi is under pressure to ditch accommodative policies.
Draghi hinted at normalising policies in June but gave no timetable. That changed last week, when he intimated that talks on a policy U-turn would start in September.
The market has interpreted the bank’s remarks as hawkish, affecting currencies and bonds, BlackRock analysts said. That lifted the euro to 24-month highs against the dollar, despite Draghi warning inflation remained low. The market indicated its response by “clearly not buying what Draghi had to sell”, said Oanda analyst Craig Erlam.
Analysts at Nedbank Corporate and Investment Banking said the central bank had maintained its dovishness in the face of lower consumer inflation in the eurozone. “However, the market is increasingly pricing in some form of normalisation to begin in early 2018,” it said.
BlackRock says the Fed remains committed to its normalisation policy.
That is despite the market now pricing in only a 46% possibility of one further hike in the US in 2017 as scepticism reigns on the possibility of higher US consumer inflation, which continues to undershoot the Fed’s targeted 2%.
Lower oil prices and weaker import prices in the US have added to the general view that inflation will remain weak, although that may be a shortterm illusion.
DRAGHI HINTED AT NORMALISING POLICIES IN JUNE BUT GAVE NO TIMETABLE