Rand under pressure as growth outlook lowered
By Vincent Mivelaz
The appointment of Tito Mboweni, former SARB (South African Reserve Bank) Governor, as Finance Minister two weeks ago was a welcome message for investors. But key challenges remain and Mboweni struggled to convince investors during the mini-budget meeting on Wednesday as the outlook appears gloomy.
Indeed, despite an easing in consumer and producer prices (CPI and PPI m/m +0.50%), largely driven by a weaker rand and oil prices, the South African economy is expected to grow at a pace of 0.70%, primarily due to a recession phase in H1. Additionally, the South African budget is expected to outreach the prior 3.6% deficit by 0.40% in 2018, and current South African debt, estimated at 50% of GDP, will grow by 10% in the coming 6 years.
Accordingly, mounting worries relating to the sovereign-rating downgrade are expected to push the ZAR downwards, which ultimately should accelerate inflation. In this scenario, the SARB, which is having its next MPC (Monetary Policy Committee) meeting from 20 to 22 November, will have to raise its key rate to offer a positive view to credit rating agencies in order to avoid junk status.
USD/ZAR is expected to strengthen, approaching the 14.70 range.
ECB easing optimism amid Italy budget risk
By Vincent Mivelaz
ECB President Mario Draghi kept policy unchanged at yesterday's MPC (Monetary Policy Committee) and sees QE ending this year. A rise in the key rate is not expected before next autumn.
Draghi downplayed the Eurozone growth and inflation outlook and this ultimately helped the single currency to gain ground against the greenback, which managed to trade above 1.14. However the trend was short-lived, given the Italian budget situation and its impact on the ECB normalization path. By the end of the day, the EUR lost its gain, trading at -0.15% against the buck.
Therefore, we expect the Italian budget issue to remain limited. For now, the ECB is not expected to implement a more restrictive monetary policy. The only driver of this decision would be a rise in inflation, which will surely happen in spite of increasing wage growth.
EUR/USD is expected to weaken ahead of US 3Q GDP and economic sentiment data, approaching the 1.1355 range