What’s driving the strengthening rand?
Keep a close eye on these four factors that could influence the course of the local currency.
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