Morning Brief – Thursday 18th

Rand Resilience

South Africa’s Rand is one of the most freely traded emerging market currencies in the world. With limited protectionist monetary architecture against capital in/out flows and with no explicit targeted manipulation of the currency from the central bank, the Rand is subject to the whims of international sentiment.

With this in mind, consider the past week or so for the Rand: developments on Trump’s global trade war; IMF warnings of political uncertainty; condemning reports of decline; and a dovish central bank. Enough threats were levied at the exposed currency in the last seven days to make its chart appear more like the musings of a toddler with a green and red crayon as opposed to the market’s considered valuations of sub-Sahara’s largest economy’s tender.

Trade War

Holding on to a 3% gain against the US Dollar since the beginning of the year, developments on the resolution of Trump’s Sino-US trade war have failed to disrupt the Rand considerably. An environment of strong global growth is imperative for most emerging market economies who themselves are reliant upon international macroeconomic affluence. Stronger economies trade more frequently and openly with each other where profits can be appropriated by countries earlier in their development cycle. Any trade war aims to disrupt this harmony and fluidity to global trade.

Threats to the trade war’s resolution in the last week alone include speculation that President Trump may place “too much” power in the hands of the Chinese, at least from the perspective of US industry. The enforcement mechanism, according to Robert Lighthizer, is what’s left to thrash out for the successful resolution or cessation of Trump’s trade war.

However, the reciprocal approach to enforcement, according to critics of the arrangement, is leaving a sour taste that Trump might put Xi too close to the driving seat of US commerce. If the public, and strategic sectors, continue to rally behind this belief, it’s not inconceivable that the US President, not an individual known for his patience and inaction, could rip the rug out under the deal. This threat to global trade could have thrown the Rand into a spiral amongst other emerging market currencies, however, the Rand continues to hold its nerve… so far.

Warnings

The IMF and Jo’burg political-risk advisory, Eunomix, have not flattered South Africa’s political economy in the past few days. Yesterday morning, headlines claiming that the nation’s decline is the “worst among nations not at war” would logically serve as a reminder or revelation that the Rand might not be a good investment for those of a more nervous disposition.

Painting pessimistic forecasts for South Africa’s President Cyril Ramaphosa, the report claimed that state capture under his predecessor Jacob Zuma has left the economy in its weakest state since its former President Nelson Mandela held office.

Moreover, the report claimed that the populist policies including land expropriation favoured by the incumbent leader of the ANC versus the more orthodox economics adopted under President Thabo Mbeki, Zuma’s predecessor, are deterring the foreign investment required for South Africa’s long term recovery.

Yet still no flinch from the Rand which, yesterday, ended the day some quarter of a percent stronger than its opening price. So is it all just priced in – baked into the cake already? Well, having recovered more than 9% against the Pound since a sell-off at the end of last year, and 10% against the Dollar, I would be more inclined to suggest that fear and contagion have been, to a considerable extent, priced out and positioning surrounding the Rand and emerging markets resembles one that should allow a slew of negative headlines to spur a devaluation in the currency.

SARB

Yesterday, South Africa’s inflation rate was read at 4.5% – bang in the centre of it’s 3-6% target band and convincingly above the previous month’s recording of 4.1%. From the Reserve Bank emerged a rhetoric of “it’s too early to tell”. Particularly due to the external and fuel-price driven inflation recording, the Bank thought it imprudent to consider tightening (or rather not loosening further) monetary policy in response to the inflation result.

Denying the market’s justifiable expectations that stronger inflation might allow the nation to raise rates and reward holders of the domestic currency in a move that would be seen as positive for its value, the Rand still didn’t budge from it’s loftier heights.

The Rand over the medium-long run remains subdued, no doubt. It’s still a relative bargain compared to the immediate aftermath of the so-called Ramaphosa effect. However, the Rand has displayed remarkable resilience in the face of its most recent attack.

Discussion and Analysis by Charles Porter

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