Rand firms on hopes of a trade deal between China and the US

South Africa’s rand was on the front foot against a stuttering dollar in morning trade on Friday (11 October), as markets await any signs of a trade deal between the US and China.

Top US and Chinese negotiators wrapped up a first day of trade talks on Thursday, with US president Donald Trump describing the meetings as “very, very good negotiation with China”, Reuters reported.

The entire year thus far has been littered with the repetition of a few key narratives, with comments such as “risk-on”, “risk-off” and “sentiment” being thrown around like confetti on a daily basis, said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

“At the same time, triggers such as the trade war, US Fed interest rate cuts, quantitative easing and global economic slowdown throw the market into a frenzy,” Botes said.

The status quo however is not only the case on a global scale. “Locally we face the same: Eskom, bailouts, sluggish economic growth and policy uncertainty all remain key concerns,” Botes said.

“Unfortunately politicians have continued to dominate the field, with politics playing a bigger role now than ever before. Boris Johnson, Donald Trump and even our own Cyril Ramaphosa, all have great influence over the world around us.

“Starting with the infamous Donald Trump, controversy seems to follow him everywhere he goes. Over the past 15 months, the trade war has had a dire effect on the global economy as a whole, with uncertainty sending waves throughout the financial markets, and it seems as though the trend is now finally catching up with the US too.”

Peregrine Treasury Solutions noted that the Purchasing Price Index (PPI) slowed to 2% year-on-year in September, undershooting the forecasted 2.3%, while JOLTs job openings also undershot, amounted to 7.051 million.

Jobless claims released on Thursday amounted to 210k, while CPI reached 1.7% year-on-year in September. The FOMC minutes, delivered by Jerome Powell, kept the door open for another interest rate cut towards the end of this month, while the balance sheet will be expanded to ensure sufficient financial market liquidity, Botes said.

The UK is still deadlocked in the Brexit debacle, with PM Boris Johnson telling Germany’s Angela Merkel that a deal between the EU and the UK is impossible, should the EU demand for Northern Ireland to remain in the bloc.

With the talks once again reaching the point of collapse, a postponement and potentially even a new referendum is now on the cards, Botes said.

Stringent bailout conditions for Eskom

In South Africa, Eskom has been one of the key talking points, with the restructure, bailout and sustainability being just a few topics that have been heavily debated in recent months. On Wednesday, the public finally caught a glimpse of the Eskom rescue plan that entails a R59 billion government bailout which is subject to 28 conditions, Peregrine Treasury Solutions said.

Some of the main conditions include:

  • The recovery of all debt owed by municipalities, corporations and departments, including the massive outstanding electricity bill of Soweto;
  • No incentive bonuses will be paid as long as the bailout conditions are in place;
  • An action plan needs to be put in place to reduce the cost of coal and diesel;
  • Daily cash reserve reporting;
  • Monthly management reports.

As the mid-term budget speech rapidly approaches, more questions regarding the ability of the fiscus to continue meeting obligations, inflated wage bills and the sustainability of SOEs arise on a daily basis, said Botes.

This week saw the World Bank cut its South African growth forecast again, this time by 0.5%.

“Growth is now pegged at 0.8% for 2019, unchanged from 2018, with poor sentiment and policy uncertainty being highlighted as two of the key drivers for the downward adjustment,” the currency expert said.

On Friday, markets will keep a close eye on the renewed trade talks and their outcome.

“We will also be keeping an ear on the ground for any additional information on the Trump impeachment process – as well as his attempts to deflect attention – that is sure to affect markets in the coming weeks and months.

“The headline data for the coming week is Chinese GDP followed by Chinese and European CPI, while retail sales are due both locally and in the US,” Botes said.

She said that pressure on the rand remains, while a range of R15.03-R15.25 remains in place for the week ahead. “The bias, however, is largely still leaning towards rand weakness considering the risk at play in the market, while a favourable outcome from the Fed could see the rand make some short-term gains.”

The rand traded at the following levels against the major currencies:

  • Dollar/Rand: R15.01  (-0.27%)
  • Pound/Rand: R18.69  (-0.22%)
  • Euro/Rand: R16.54  (-0.17%)

Read: World Bank cuts South Africa’s growth forecast

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Rand firms on hopes of a trade deal between China and the US