Rand hits 5-month high on US trade deal

The trade war took a turn on Thursday (12 December) as the US and China reached an interim deal, sending the rand to its strongest levels against the dollar since July.

Across the Atlantic, Boris Johnson’s Conservative party seems likely to have won the UK election with a clear majority, a result favoured by markets and evident in solid support for the pound, said Bianca Botes, treasury partner at Peregrine Treasury Solutions.

“Emerging markets savoured the Sino-US news as risk appetite reignited, seeing the rand gain significant ground against all major currencies except sterling.

“Given the euphoria in the air, data will be of little consequence today as Chinese FDI and US retail sales are due for release,” she said.

The wave of renewed risk appetite saw the rand opening at R14.44 against the dollar – its strongest level since July. The local unit however, struggled against the pound, losing more than 2%.

UK elections

Boris Johnson won a decisive victory in the UK election, putting the country on course to leave the European Union next month after the biggest shift in British political allegiances for decades.

The result vindicated Johnson’s gamble on an early vote to break the deadlock in Parliament over Brexit that’s paralyzed the country, Bloomberg reports.

The leader of the main opposition Labour Party, Jeremy Corbyn, said he would stand down while Liberal Democrat leader Jo Swinson lost her seat.

The  sterling surged to its highest level since May 2018 against the dollar and the strongest rate versus the euro since just after the 2016 Brexit vote.

The news also rippled through to other assets with the euro touching a four-month high against the dollar.

Nigel Green, chief executive and founder of deVere Group, said: “The pound has enjoyed its biggest surge in a decade on the hopes that a solid Conservative majority can finally end the Brexit deadlock.

“Many traders were caught off guard by the size of the majority and this may push the pound even higher than previous predictions. We could see bullish traders now take it to $1.38 or maybe even as high as $1.40.

“With more political certainty due to the large majority, the UK economy is also likely to receive an election bounce.”

Issues facing rand

While international factors continue to be a boon for the rand, the local currency is likely to come under renewed pressure as Eskom continues with load shedding.

South Africa is also facing a further cut to its credit rating by Moody’s Investors Service which, according to Reserve Bank deputy governor Kuben Naidoo, could see a selloff of between $5 billion and $8 billion of its bonds.

Moody’s recently cut its outlook on South Africa’s rating to negative, meaning the next move could be a reduction to junk because its current assessment is the lowest investment grade. That would bring it into line with S&P Global Ratings and Fitch Ratings.

Like the other two major ratings companies, it’s concerned by deteriorating government finances and the indebtedness of state-owned companies such as Eskom.

In morning trade on Friday, the rand traded at the following levels against the major currencies:

  • Dollar/Rand: R14.46  (-0.24%)
  • Pound/Rand: R19.49  (2.02%)
  • Euro/Rand: R16.16  (0.11%)

Read: The rand will hit R20 to the dollar in 2020 – and other ‘outrageous’ predictions from banking experts

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Rand hits 5-month high on US trade deal