Euro to climb further against greenback
By Yann Quelenn
The Euro is back to a two-month high above 1.19 USD, despite a likely US interest rate hike in December. For now, we believe the EUR has room for further appreciation.
Germany’s inability to form a government has not weakened the Euro significantly. The real story here is a weakness in the USD. Although 2-year US treasuries have hit levels unseen since 2009 at 1.75%, the back-end of the curve remains flat at around 2.25%. So inflation expectations are low – too low. The US Federal Reserve ought to raise rates even higher, but the central bank knows that this would trigger turmoil in the bond market.
South African debt weakens the rand
By Arnaud Masset
After a bounce-around following South Africa’s credit downgrade, the ZAR has stabilised, but we expect further weakness. The government will struggle to come up with a cogent plan, so USD/ZAR should continue moving towards 14.75.
On Friday Standard & Poor’s lowered the rating of treasuries into junk territory, to BB from BB+, and S&P slashed the rand’s investment grade to BB+ from BBB-. Moody’s placed the Baa3 rating on review for downgrade, noting “the decision to place the rating on review for downgrade was prompted by a series of recent developments which suggest that South Africa's economic and fiscal challenges are more pronounced”.
USD/ZAR rose almost 2.60% in a matter of minutes and hit 14.4656 before the closing bell. The pair reversed losses on Monday morning, easing to 13.90. Treasuries barely moved, with both the 2-year and 10-year yields rising only 6 basis points – their muted reaction reflects that they were already were stripped of investment grade in April. Still, this is a negative signal for investors and a warning to the government. A downgrade to junk by Moody’s would exclude South Africa from the World Government Bond index, which would further depress treasury prices.