Rand Outlook – all Eyes on ECB

The central focus this week will rest with the European Central Bank (ECB) policy decision on Thursday where market expectations will be matched should the bank announce a large-scale stimulus program.

There will also be the Bank of Japan policy decision, Bank of England minutes and latest round of global preliminary Purchasing Managers Indices. A reinforcement of the underlying dovish nature of these major central banks going forward is expected. This is good news for the trade-weighted rand which remains so reliant on foreign capital flows given South Africa’s sizeable current account deficit and other fundamental shortfalls. A new wave of central bank cautiousness from abroad holds the potential to entice investors into putting on some of their riskier investments of the past (during the Fed QE period), with some evidence of this seen in the manner in which foreign bond inflows to South Africa have ramped up.

This renewed dovishness will also be shared by the South African Reserve Bank (SARB) as South Africa’s own inflation metrics soften to a degree which in the near future will see rate cut discussions. Should the SARB end its hiking cycle, this would be viewed as a medium-longer term fundamental risk to the rand, as low interest rates have been core to the issue of an economy maintaining a consumptive rather than productive bias.

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