South African Rand (ZAR) Halts Downtrend before FOMC Announcement

Last week a number of factors contributed to the South African Rand hitting a 13-year low against the US Dollar. Local energy supply concerns, the introduction of quantitative easing in the Eurozone (one of South Africa’s main trading partners) and a bullish US Dollar all dragged the Rand down. However, at the beginning of a data-heavy week, the Rand was trading in a narrow range against rivals like the US Dollar and Pound. The US Dollar to South African Rand currency pair was trading in the region of 12.4290, down from 12.4905, while the Pound to Rand exchange rate was trending in the region of 18.3576, also down from the day’s high. Later today USD/ZAR volatility could follow the publication of US industrial and manufacturing production figures.

With the Federal Open Market Committee interest rate announcement fast approaching, any US ecostats could have an impact on the tone adopted by policymakers. If today’s US industrial output numbers match or exceed forecasts, it would support the case for a summer interest rate increase from the Fed and could trigger a fresh uptrend in USD/ZAR trading. On Wednesday investors will be watching closely to see whether the Fed cuts the word ‘patient’ from its comments relating to revisions to borrowing costs. If the Fed disappoints expectations and maintains an air of caution, higher risk currencies like the Rand could rally.

Of course, South African reports will also be having an impact on ZAR trading this week. On Tuesday South Africa will be releasing current account figures for the fourth quarter. According to industry expert John Cairns; ‘A very bad (current account) figure could set the rand running on its own. While the deficit is expected to contract further this year, we seem to be struggling to fund it: foreigners have turned net sellers of bonds year-to-date.’ However, Wednesday’s South African inflation and retail sales numbers are likely to be more influential in terms of generating currency movement. Reuters News Agency has forecast that annual inflation eased from 4.4% in January to 3.8% in February. Annual retail sales growth is also believed to have fallen from 3.4% to 1.91% in January in spite of month-on-month growth of 0.13%. Negative domestic data could inspire additional Rand declines. As the Rand tracks the Euro, developments in the Eurozone (such as the Greek negotiations and ecostats like the ZEW economic sentiment surveys) will also have an impact on the currency.