Rand pulls back as ECB slams brakes on dollar rally

The rand recovered some of its losses on Thursday, after expectations that the European Central Bank would ease and eventually halt its bond-buying programme by year-end slammed the brakes on the US dollar rally.

Peter Praet, ECB chief economist, and Jens Weidmann, president of Germany’s Bundesbank and member of the ECB’s governing council, said on Wednesday - ahead of next week's ECB monetary policy meeting - that they expected eurozone inflation to edge towards the central bank’s target of 2.0%, bolstered by a pick-up in economic activity.

This highlighted the view that the current weakness in growth is temporary, and boosted market expectations that the central bank would announce the halt of its bond-buying programme by the end of the year, said RMB economist Mpho Tsebe.

The euro subsequently strengthened to 1.177 against the dollar, having touched a low of 1.154 in May, with global equities and emerging market currencies benefiting from risk trading, added Tsebe.

"Whether this is indeed the case is a matter of opinion, but it was a welcome breath of fresh air in the market, and the US dollar rally has been halted somewhat," commented TreasuryOne's Andre Botha.

The local unit, which opened 6c firmer at R12.71 to the greenback from its previous close, was trading at R12.74/$ (+0.23%) by 11:35.

The rand suffered heavy losses on Tuesday after disappointing local quarterly GDP data, and amid renewed global trade war concerns. Broad weakness in the dollar helped reverse this trend late on Wednesday, as the rand was looking to break R12.90/$, and on Thursday the local unit touched an intra-day low of R12.68/$.

Tsebe said emerging market currencies had depreciated due to a reversal of capital flows, as investors have turned to a strengthening US economy for profits, while the price of Brent crude oil is trading 56% higher compared to a year ago.

This has prompted hikes in interest rates to protect local currencies and fight inflation, with the Reserve Bank of India the latest EM central bank to raise rates by 25 basis points for the first time since 2014, in an effort to curb inflationary pressures stemming from high oil prices and currency weakness.

Botha said the risk that the lousy GDP number brings forth is that every release from now on will be combed over and has the potential to be market moving.

"This is precisely the case today, with the manufacturing data out later this afternoon. With the mining and manufacturing sector being one of the culprits in the negative GDP print, a lot of scrutiny will be placed on the number this afternoon. Should the number disappoint, we could see the rand running again," said Botha.

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