Rand firms as ECB decision weakens euro in volatile trade

The rand was sharply firmer on Thursday afternoon after the European Central Bank (ECB) kept rates unchanged, as expected, and also announced it would end its stimulus programme by year-end.

However, the euro traded in the opposite direction, weakening sharply against the dollar in what analysts described as a reaction to the ECB’s cautious stance on when interest-rate increases will take place.

The prospects of higher interest rates tend to support the dollar.

The ECB said it would end its asset-purchasing programme, in place since the financial crisis of 2009, at the end of December. This will entail the tapering, or lessening, of its monthly purchases from €30bn in September to €15bn from October to the end of the year. This saw the euro spike to $1.1851.

However, the euro weakened soon thereafter, after the ECB said it expected rates to remain unchanged “at least throughout the summer of 2019”. This relatively dovish and cautious reaction unsettled the market, which expected a more hawkish stance. The euro weakened to $1.1733 in response.

Analysts said hawks in the market had a misplaced and unrealistic view on what the ECB would do. Oanda analyst Craig Erlam said given the political situation in Europe right now, most notably Italy, and the prospect of a trade war with the US, the ECB would want to be extremely careful with stopping its quantitative easing and laying the groundwork for a potential rate hike next year — “Especially as growth remained modest and inflation well below target.”

At 2.27pm, the rand was at R13.1498 to the dollar from R13.3019; R15.424 to the euro from R15.6855; and R17.5881 to the pound from R17.7973. The euro was at $1.173 from $1.1793.

Local bonds firmed on the stronger rand, with the R186 bid at 8.87% from 8.98% and the R207 at 7.555% from 7.640%. The German 10-year bund was at 0.4526% from 0.4723%, with the US 10-year at 2.9328% from 2.9657%.