The rand hit its best levels in three months on Wednesday (8 November) as emerging markets reacted positively to president Donald Trump’s loss of full control of Congress.
Bonds, currencies and stocks rose as speculation the midterm election result will produce policy gridlock in Washington weakened the dollar and took the edge off US Treasury yields, Bloomberg reported.
But with one source of uncertainty out of the way, focus is now shifting to what it means for Trump’s tax cuts and US-China trade relations, and how quickly the Federal Reserve will press ahead with the removal of stimulus.
“What a day for the rand and EM’s in general. We have seen the rand reach a level of R13.88 against the US dollar as the US dollar slid against most currencies on the back of the US Mid-Term elections results,” said Andre Botha, senior currency dealer at TreasuryONE.
“The results showed as expected that the Democrats won the House of Representatives and that the Republicans kept the Senate. In layman’s terms, this means that it will be a lot more difficult for the President to push through radical policy as it needs to be vetted by both houses before it can come into law.
“We now stand with a house divided and this can cause some friction and a lot of impasses going forward. The natural reaction to the news was for the US dollar to weaken as the result brought about some uncertainty in the US going forward. We did see the EUR/USD almost touching 1.1500 yesterday on the back of the news,” Botha said.
He noted that the morning session on Wednesday saw the dollar clawing back some of its losses, “but what is interesting is that the rand has hardly reacted to the move and is still trading below R14.00 which bodes well for the rand.”
He said that should the local unit stay below R14.00, “it could be the foundation for a move lower as investors are not running from EMs in the wake of the US dollar strength”.
- Dollar/Rand: R13.95 (0.40%)
- Pound/Rand: R18.31 (0.45%)
- Euro/Rand: R15.95 (0.29%)
Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital Management, said: “We are looking at a consolidation in EM and further gains in the Mexican peso and South African rand.”
Federal Reserve policy makers meeting in Washington will weigh how to describe a moderation in US economic growth as they reinforce expectations for a fourth 2018 hike next month, Bloomberg reported.
The Federal Open Market Committee is widely expected to keep the benchmark target for rates unchanged in a 2.00% to 2.25% range at the conclusion of its two-day meeting on Thursday.
“We have the US Fed announcement tonight regarding their interest rate and we expect the rate to stay unchanged. We believe that this would be a non-event and that most of the market moves will be as a result of the hangover from yesterday and this could mean a range bound day,” said Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions.