ECB easing optimism amid Italy budget risk
At yesterday’s MPC, ECB President Mario Draghi maintained the policy unchanged and the end of the QE program by year-end, as expected. A rise in the key rate is not expected before next autumn.
Mario Draghi managed to cool down optimism, downplaying the Eurozone growth and inflation outlook, which ultimately helped the single currency to gain ground against the greenback, which managed to trade above 1.14. However the trend was short-lived, as the question relating to the Italian budget situation and its impact on the ECB normalization path came out. By the end of the day, the EUR lost its gain, trading at -0.15% against the buck.
Accordingly, 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.
Rand under pressure as growth outlook lowered
The appointment of Tito Mboweni, former SARB Governor two weeks ago was a welcome message for investors. However key challenges remain. Although his rapid role taking, Tito Mboweni struggled convincing investors during the mini budget meeting on Wednesday as the outlook appeared 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, South African budget is expected to outreach prior 3.6% budget deficit by 0.40% in 2018 and current South African debt estimated at 50% of GDP will be growing by 10% in the coming 6 years.
Accordingly, mounting worries relating to the sovereign-rating downgrade is expected to push the ZAR downward, which ultimately should accelerate inflation. In this scenario, the SARB, which is having its next MPC between the 20-22. November 2018 will have to raise its key rate in order to provide a positive view to credit rating agencies, in order to avoid a junk status.
USD/ZAR is expected to strengthen, approaching the 14.70 range.
