As expected, the gathering of the EU finance ministers yesterday failed to produce any concrete outcomes. The discussion appeared to flit around Greece’s actual financing needs and instead focused on “technical issues”, which may arise should members of the EU grant emergency loans to the embattled nation. On the whole, the ministers appeared rather hesitant, mulling over matters rather than making firm resolutions. Their indecisiveness, particularly with regard to a draft law to regulate hedge funds and private equity firms, provided little cheer for the EUR, which registered gains against the USD owing to better-than-expected German investor confidence data and S&P’s reaffirmation of Greece’s BBB+ rating. Even though Greece looks increasingly likely to manage their fiscal challenges on their own, we still believe that an EU-led bailout would expedite the situation and perhaps ease growing dissension within the beleaguered Eurozone nation. A long drawn-out saga will continue to pose downside risk to the EUR and remains restrictive to further ZAR gains. For now USD/ZAR continues to oscillate around 7.36, following the FOMC decision yesterday in which the Fed kept rates unchanged. The local unit should remain constrained in a tight range given mild international event risk today.

It is worth noting that Moody’s investor service upheld their stable ratings outlook for South Africa yesterday. Although an acceleration in economic growth is key to an upgrade, a reassessment of the current rating also hinges on increases in foreign liquidity and a sustainable current account deficit, which we forecast at -5.1% of GDP in 2010 and -6.1% in 2011. In terms of the current account, we anticipate a widening toward the latter part of the year as a stronger ZAR might constrain exports and encourage opportunistic buying thereby increasing import growth and leading to a broadening of the trade deficit. Similarly, we are likely to observe an increase in income payments as an improvement in corporate profitability will produce larger dividends payments to foreigners. Though adequately funded by portfolio flows, we remain wary of current account financing given that a slowdown in global activity could generate capital market outflows and incite ZAR volatility.

THE CROSSES

• EUR/USD’s recent gains and relative ZAR stability should keep EUR/ZAR elevated above 10.00 today.
  
• Favourable UK housing data showing a 6.2% rise in housing prices and an opinion poll which revealed that the upcoming general elections in Britain may result in a majority rather than a hung parliament,supported GBP gains against the USD. This has allowed GBP/ZAR to migrate back toward 11.20.
  
• ZAR/JPY continues to prosper around 12.15.