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Will South African rand downward momentum continue? |
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22nd Jun 2020

Week ahead: Will South African rand downward momentum continue?

The South African rand reversed most of its previous gains against the US dollar last week. The currency lost about 5% as the number of coronavirus cases in South Africa continued to rise. The decline was also attributed to risk aversion as the number of cases in Beijing and in several US states rose.

Elsewhere, central banks from the UK, Switzerland, Norway, and Japan delivered their rates decision. In the UK, the BOE left rates unchanged and added £100 billion into its QE program. Similarly, in Japan, the BOJ expanded its QE program to about $1.1 trillion. In Norway, the hawkish central bank started preparing the market of eventual tightening.
Last week, the South African government announced more measures to ease coronavirus-related restrictions. Ironically, it did this at a time when the number of infections is rising. According to Worldometer, the country has confirmed more than 80,000 infections and almost 1,700 deaths.

This week, the rand will move in reaction to several important numbers from the country. On Tuesday, the bureau of statistics will release the first quarter’s unemployment rate data. While this will be an important number, it will not provide a clear picture of the country’s economy because it will not include April when the lockdown started.

On Wednesday, the office will release the April inflation numbers. Analysts polled by Reuters expect that the headline CPI rose by 3.4% in April while the core CPI rose by 3.8%. It will also release the March retail sales data. Finally, on Thursday, the office will release the factory gate prices.
The Reserve Bank of New Zealand (RBNZ) will be the only major central bank to release its interest rate decision this week. This will be the first monetary policy decision after the country declared itself free of Covid-19. Therefore, it will be interesting to see whether the bank will change its language on the state of the economy and future monetary policies.

According to Reuters, most analysts expect the bank to leave interest rate unchanged at 0.25%. In addition to the decision, the country’s statistics office will release the May trade numbers. An improvement from the previous month will signal that New Zealand’s recovery is going on well.
The US dollar rose last week because of risk aversion and hawkish economic data from the US. This week, we will receive additional numbers from the US. Today, the National Association of Realtors will release the existing home sales numbers. Analysts expect these numbers to show a slight improvement after the previous month’s 17.8% decline.

On Tuesday, we will receive the preliminary manufacturing and services PMI data, manufacturing index data from Richmond Fed, and new home sales numbers. On Thursday, the Bureau of Statistics will release the GDP data, durable goods numbers, and consumer spending data. The chart below shows that the EUR/USD pair moved below the neckline of the head and shoulders pattern.
Early this month, manufacturing, and services PMI data by Markit sent a signal that the global economy was recovering, albeit slowly. This week, we will see whether indeed the economy continued with the same pace this month. Tomorrow, Markit will release the preliminary manufacturing and services PMI data. A sign of improvement in major countries like Germany, United States, and Japan will increase the likelihood of a V-shaped recovery of the world economy.
In terms of economic data, this week will not be as busy as last week when more than 5 central banks delivered their decision. As such, most traders will be focusing on coronavirus and whether the cases are continuing to increase in South Africa, China, and in the US.