What’s driv­ing the strength­en­ing rand?

Keep a close eye on these four fac­tors that could in­flu­ence the course of the lo­cal cur­rency.

Finweek English Edition - - OPINION - Edi­to­rial@fin­week.co.za Tu­misho Grater is an eco­nomic strate­gist at No­vare Ac­tu­ar­ies and Con­sul­tants.

given the na­ture of the rand and its sen­si­tiv­ity to po­lit­i­cal de­vel­op­ments, the lo­cal cur­rency has proved to be re­silient in the face of po­lit­i­cal and pol­icy un­cer­tainty pre­sented both glob­ally and lo­cally. Nei­ther the ap­pre­ci­a­tion nor the de­pre­ci­a­tion of the rand has been a smooth ride and over the past years the lo­cal unit has zigzagged, mir­ror­ing changes in in­vestors’ risk aver­sion and re­act­ing to other ex­ter­nal sur­prises.

The rand has ap­pre­ci­ated against a range of ma­jor cur­ren­cies year-to­date, in­clud­ing a more than 7% gain against the green­back. One might be tempted to take ad­van­tage of the re­cent strength of the rand and start pack­ing for that over­seas hol­i­day, but con­sider the fol­low­ing fac­tors that could well nudge the rand – in ei­ther di­rec­tion – be­fore jet­ting off.

1. The Trump card

The de­bate rages on about what will ul­ti­mately dic­tate the dol­lar’s moves in 2017. From a lo­cal per­spec­tive, any sig­nif­i­cant move­ments in the green­back will sub­se­quently im­pact the rand. To date, the slug­gish US fis­cal process has been, and still is, ben­e­fi­cial to emerg­ing-mar­ket cur­ren­cies such as the rand.

US Pres­i­dent Don­ald Trump’s knack for be­ing a dis­rup­tor re­mains a wild­card. Trump’s con­sid­er­a­tion to use tar­iffs to en­cour­age com­pa­nies to stay in the US (raised in Jan­uary 2017) sent the US dol­lar plum­met­ing against ma­jor cur­ren­cies as this strat­egy runs the risk of spark­ing a trade war.

The lo­cal unit may have ben­e­fit­ted from the dol­lar weak­ness, but pol­icy ac­tions that threaten an im­proved US growth and trade out­look need to be con­sid­ered over the longer term, and may also be neg­a­tive for the rand. With that be­ing said, the Repub­li­can Party brings with it a range of calm and clear-headed thinkers who have a good grasp of economics and a fo­cus on busi­ness, which may help limit po­ten­tially dam­ag­ing eco­nomic pol­icy mis­takes.

The re­cent G20 meet­ing in Ger­many may well have sig­nalled the col­lapse of a decade-long tra­di­tion of sup­port­ing open trade. (Also see page 32.) In July, trade min­is­ters re­sponded to the dis­turb­ing rise of pro­tec­tion­ism and com­mit­ted to cut­ting costs and in­creas­ing pol­icy co­or­di­na­tion – in essence, re­sist­ing the pro­tec­tion­ist move­ment. Fast for­ward to less than a year since this pledge was made and no ex­plicit com­mit­ment of re­ject­ing pro­tec­tion­ism has been seen. The lack of de­fin­i­tive ac­tion in this re­gard has led some to be­lieve that per­haps the world may just tol­er­ate Trumps’ in­sis­tent ap­proach to global trade.

2. Con­nect­ing the dots

March left some mar­ket par­tic­i­pants dis­ap­pointed as the US Fed­eral Re­serve’s stance was per­ceived to be more dovish than ex­pected. The Fed’s rate hike of 25 ba­sis points had al­ready been fac­tored in by the mar­ket and it was the so-called “dot plot” (re­fer­ring to the Fed’s in­ter­est rate pro­jec­tions, which calls for three hikes this year), that reg­is­tered as a let-down for traders who were look­ing for a steeper tight­en­ing course. This sub­se­quently led to a fall in the dol­lar that emerg­ing-mar­ket cur­ren­cies, in­clud­ing the rand, cap­i­talised on. Re­cent moves show that for­eign­ers have con­tin­ued to buy emerg­ing-mar­ket cur­ren­cies as the search for yield-car­ry­ing trade con­tin­ues. The re­newal of US mon­e­tary pol­icy tight­en­ing is still viewed as a risk to global cap­i­tal flows, as well as emerg­ing-mar­ket ex­change rates in gen­eral.

Should Trump’s fis­cal stim­u­lus pack­age lead to higher in­fla­tion­ary pres­sures in the US econ­omy, this may prompt the Fed to hike rates more ag­gres­sively. This, in turn, could well trans­late into a stronger dol­lar that could weigh down the rand.

Should Trump’s fis­cal stim­u­lus pack­age lead to higher in­fla­tion­ary pres­sures in the US econ­omy, this may prompt the Fed to hike rates more ag­gres­sively.

3. How’s it go­ing, China?

Global risk as­sets (such as the rand) have ex­pe­ri­enced dwin­dling volatil­ity and ris­ing prices as the US, the euro­zone, and China swung into a syn­chro­nised re­bound in the sec­ond half of 2016. In­vestor sen­ti­ment to­ward China im­proved when its eco­nomic re­bal­anc­ing process stalled in mid-2016. As China’s re­bal­anc­ing con­tin­ued, and the over­all pol­icy stance shifted to­ward be­ing more limited in the fi­nal quar­ter of 2016, caus­ing in­fras­truc­ture in­vest­ment to start de­cel­er­at­ing, while heavy in­dus­trial out­put also started weak­en­ing. These de­vel­op­ments are likely to ex­ert pres­sure on com­mod­ity prices, es­pe­cially for in­dus­trial met­als (in par­tic­u­lar cop­per and iron ore), for which China ac­counts for more than half of the global de­mand. This may spill over into down­ward pres­sure on the cur­ren­cies of com­mod­i­ty­ex­port­ing emerg­ing mar­kets.

4. Po­lit­i­cal pit­falls

Po­lit­i­cal de­vel­op­ments will re­main a driv­ing force with event risks in the cur­rency mar­ket stem­ming from the pos­si­ble in­crease in ten­sions be­tween the US and China (given the height­ened rhetoric sur­round­ing each coun­try’s geopo­lit­i­cal sphere of in­flu­ence), the pos­si­bil­ity of trade wars, the rise of anti-EU par­ties in the up­com­ing elec­tions, and pos­si­ble set­backs in the Brexit ne­go­ti­a­tions. The lo­cal land­scape also con­tin­ues to present a de­gree of risk, es­pe­cially given the ANC’s pol­icy and lead­er­ship con­fer­ences tak­ing place dur­ing the course of the year. Neg­a­tive un­fore­seen shocks are likely to trans­late into rand weak­ness.

US Pres­i­dent Don­ald Trump

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