Looking back on last week, one could only shake one’s head in disbelief if you look at the moves in the currency markets. The Rand that was trading above R19.00 not so long ago, and has moved more than a Rand stronger in the last week and a half. The question is what has brought on this relief rally and will it continue.
While global economies have started to open, we have seen renewed “risk-on” sentiment as the world is slowly but surely returning to normal after the abnormality of the last couple of months. We have seen all the major EM currencies enjoying the latest bout of risk sentiment, and the Rand was no different in following its EM currency brethren on the path stronger.
While improved sentiment has played some part in an improved EM currency basket the main reason for the shift is the weakness in the US dollar of late with the US dollar weakening from 1.0800 against the Euro to almost touching 1.1400 by the end of last week. The weakness in the US dollar was started with the global market easing of the helter-skelter run to safe havens as fears around COVID-19 seemed to have eased. However, last week the focus was more on a strengthening Euro.
In a bizarre non-economic move, the Euro gained a lot of ground against the US dollar after the ECB announced a bigger stimulus package than the market expected. Typically, a stimulus is associated with a weaker currency directly after the announcement; however, this bucked the trend completely. Generally, monetary and fiscal measures to stimulate growth tend to weaken currencies. Still, for now, they are being welcomed by markets fearful of a slow, weak recovery from the economic slump caused by the spread of the coronavirus. The Euro is, therefore, benefiting from what appears to be an unusually coordinated response from the EU authorities.
Attention, therefore, will be high this week as the Eurogroup meets on Thursday where member states will discuss their responsibility to the Euro given the latest measures. We have already seen Finland’s government said it would reject the proposal in its current form, but should all parties agree it could see the Euro heading stronger. The Euro might head into a bit a resistance as the main data set for last week the US non-farm numbers came in better than expected. US non-farm payrolls came out with a massive upside surprise, coming out at 2.5m jobs created instead of the forecasted 8m job losses. Also, the unemployment rate is at 13,7% versus an expected 19%. Will this renewed optimism reverse some of the Euro gains?
Looking at this week, we start with the Rand looking pretty comfortable at the R16.80 level having failed to break the R16.70 level on Friday. The overwhelming feeling is that the Rand has run quite aggressively and is due for a pullback to consolidate the break lower. The best visual to explain the Rand is to imagine it as a bungee cord where an overextension of the cord leads a “correction” of sorts. However, we are in strange times, and there is also a counter-argument that the word is returning to a semblance of its former self and markets should return to “normal” levels.
On the data and event front this week, the interesting day will be Wednesday when the US Fed will announce their interest rate decision. The market is expecting no action from the Fed, but the comments after the decision usually hold more value as everybody will be looking for the Fed’s thinking into getting the US economy chugging along post-COVID.
The other key items to watch will be the movement in the EUR/USD, risk sentiment across FX and Equity markets, the Eurogroup meeting on Thursday and any possible COVID news that could change outlooks.