How Italy is knocking the rand: analyst
The market buzzword at the moment is Italy – and the possible impact its political shenanigans will have on global markets.
This is according to Andre Botha, dealer at TreasuryONE, who notes that the European country is facing instability after the weekend drama where Italian president Mattarella blocked the formation of a coalition government that would have been mostly against the euro.
“Should that coalition government have been formed, we could have seen real fireworks with Italy wanting to leave the Eurozone. With the interception of the Italian president, the internal chaos in Italian politics has hit the roof,” he said.
However, the impasse in the Italian government has also had some far-reaching effects, with the euro taking a beating as investors dumped any exposure to Italy and moved into US Treasury Bonds. Global equity markets also sold off, which had a bearing on Emerging Markets (EM) as the market turned decidedly risk-off, Botha said.
“The secondary effect that could spring from this Italian situation is that the US will start having second thoughts about adjusting their interest off their forward guidance path.
“As more investors find security in the US, it will increase the money supply. With increased money supply leads to a situation of lower interest rates which coupled with a stronger dollar could force the Fed to stick to their forward guidance. Europe is also a significant trading partner of the US so a slowdown in Europe will have a contagion effect in the US.”
“The risk-off nature of yesterday’s trading was the primary force that drove the rand to within sight of the R12.70 level. With the situation in Italy being uncertain we can expect two-way risks as new headlines enter the market.
“This will increase the volatility in the market, and we could see some violent swing in both directions depending on the tone of the headlines.”
The rand has stayed quite resilient in the face of the US dollar strength and is a shot in the arm of the countries profile abroad, but it will face renewed scrutiny along with its EM peers with the release of the US GDP number later on this afternoon, he adds.
“Should the number beat expectations we could see the EM currencies on the back foot again and the rand trading near the R12.80 levels post-release but there is also a positive should the number miss the mark.”
Read: Here’s why some emerging markets including South Africa are suddenly vulnerable to a melt down
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