Rand stages a comeback
After suffering an initial blow following Donald Trump’s election as the next president of the United States, the rand has recovered its losses as markets shake off the results and turn their focus back to interest rates.
By 10h00 on Friday (8 November), the rand was trading stronger at R17.42 to the dollar, after weakening to levels as high as R17.84 following the outcome of the US presidential election results.
According to the Bureau for Economic Research (BER) chief economist Lisette IJssel de Schepper, Trump’s victory this week came with a mixed market response.
Emerging market economies like South Africa suffered as the prospect of American protectionism and anti-China trade wars weighed on them, but there was also relief as the uncertainty of the US election and worries over the transition dissipated.
“One of the advantages of Trump’s convincing win was that the lingering uncertainty around the outcome, and the acceptance thereof, did not materialise. Uncertainty measures fell back, and markets fully focused on what a Trump victory means for the economy,” she said.
The economist noted that while the rand was initially not spared from the market reaction, it c”ame back quite nicely” and actually managed to strengthen by more than 2% from last week against both the dollar and the euro.
“In addition to the knee-jerk reaction following Trump’s victory, the concerns voiced by rating agency Fitch about the economic and fiscal projections presented in last week’s Medium Term Budget Policy Statement may have added to the local woes early in the week,” she said.
Markets also quickly turned to interest rates, with the US Fed electing to cut rates by 25 basis points on Thursday, in line with market expectations. This lower and slower rate cut cycle softened the dollar, adding to some rand strength.
The US Fed also announced it would lower the benchmark rate target range to 4.5-4.75%.
The second consecutive cut was expected, and the decision was unanimous. The Fed judged inflation as still “somewhat elevated” and is slightly more pessimistic about the labour market.
The central bank did not provide specific guidance on what would happen with the interest rate going forward, stressing its data dependence.
“Generally, more cuts are expected, but the uncertainty around Trump’s impact on the economy makes calling the level of terminal rate more tricky,” the BER said.
IJssel de Schepper wanted that if Trump’s policies prove to be inflationary—as some fear—it could have implications for monetary policy in the US and the dollar, with a weaker rand, higher inflation, and higher South African interest rates a possible outcome.
“However, this will take time to filter through, and unless the rand exchange rate settles at a much weaker level over the near term and impacts our inflation trajectory, it should not derail our upcoming rate cuts,” she said.
The South African Reserve Bank (SARB) is expected to continue cutting rates in the near term, with another 25 basis point cut anticipated at its final meeting of the year later this month.
Overall, though, IJssel de Schepper said that the impact of a Trump presidency on South Africa is up in the air.
“Only time will tell if there will be much difference,” she said. “South Africa is a small, open economy and very much dependent on the whims of the global economy.”
“Should a Trump presidency boost US growth prospects, this should ‘theoretically’ be positive for South Africa,” she said, adding that an infrastructure-heavy growth spurt could be positive.
However, if the drivers of US growth are protectionist and inward-driven policies, the spillovers will not be the same as in the past, she said, noting that some have argued that the negative impact of higher tariffs would outweigh positive impacts.
“Importantly, if the Chinese economy suffers as a result of Trump’s policies, it could lead to lower demand for South Africa exports with negative implications for domestic growth.
“In fact, there is real concern that Trump may support policies that could directly hurt South Africa—AGOA and trade tariffs in general are top of mind.
“But, he might also think he has bigger fish to fry than to worry about Africa,” she said.
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