The rand continued to weaken in trade on Friday morning (31 May), having reached a seven-month low against the greenback, as the global backdrop continues to place excessive pressure on emerging markets.<\/p>\n
“If there is one thing the US has come to master, it is conflict. The nation has quite the ability when it comes to global altercations, and president Donald Trump certainly does not walk away from a fight,” said Bianca Botes, corporate treasury manager at Peregrine Treasury Solutions.<\/p>\n
“While the dynamic mostly reminds us of a bully in a playground, one cannot help but wonder if he has met his match facing off against China.<\/p>\n
“The world\u2019s second largest economy seems to have no intention to budge, and continues to stand its ground against the mighty US, while the US locks horns with various other friendly and not so friendly “allies” including Iran and the EU.”<\/p>\n
In a bizarre new twist, Botes pointed noted that Trump has added Mexico to the list of countries being slapped with additional tariffs as he announced overnight that a 5% tax will be imposed on all Mexican goods from 10 June and will ‘gradually increase’ until the flow of undocumented immigrants across the border ends.<\/p>\n
In the midst of the controversy, the US continues to present solid economic data, especially when compared to its peers, although its sustainability is under scrutiny, Botes pointed out.<\/p>\n
While initial jobless climbed to 215,000 from 212,000, the employment rate in the US remains exceptionally healthy.<\/p>\n
GDP from the economic powerhouse continues to grow in line with expectations, expanding by 3.1% in Q1 of 2019.<\/p>\n
The increase of 1.3% in consumer spending, was however not reflected in corporate earnings for Q1, which slumped by 3.5% which many attribute to trade spats between the US and its allies.<\/p>\n
No Brexit in sight<\/strong><\/p>\n Across the Atlantic, protectionism is also in play, Botes said.<\/p>\n “Some three years after the Brexit votes were tallied, Britain is no closer to reaching a mutually acceptable deal with the EU that could see the controversial ‘hard exit’ being realised in June.<\/p>\n “The fall of a prime minister, the protest by citizens, and yet Brexit is just as much of a reality as it was in 2016.”<\/p>\n The currency expert said that uncertainty continues to pose a threat not only to the stability of the UK, but also to the overall market sentiment.<\/p>\n For emerging markets, the risk-off environment continues to cast a dark shadow over these economies, and their typically riskier assets, Botes said.<\/p>\n “China PMI disappointed with a drop to 49.4 in May, indicating a slowdown in manufacturing and adding significant pressure to emerging market appetite while tension between the US and China is expected to negatively impact on the Asian economy.”<\/p>\n Rand takes a knock<\/strong><\/p>\n Peregrine Treasury Solutions said that while liquidity of the South African market is often highlighted as a positive factor, it also causes the rand and rand-denominated assets to be sold off as a proxy for other more illiquid emerging-market assets.<\/p>\n The rand lost as much as 2% on Tuesday after remaining fairly stable during the previous few trading sessions.<\/p>\n “Local fundamentals, although limited in their contribution to the performance of the rand, played a part this week as markets anticipated the announcement of president Ramaphosa’s Cabinet. On Wednesday evening it was all eyes on the Union Buildings as he announced the new administration for the Republic.<\/p>\n “After promises of a new dawn, market expectations were high, probably unfairly so, but this meant the announcement was somewhat underwhelming,” Botes said.<\/p>\n The analyst said that while markets reacted positively to the newly elected cabinet, the anticipated correction in the local currency was undermined by two key elements:<\/p>\n Peregrine Treasury Solutions stressed that all is not doom and gloom. “While the cabinet may still be large and the inclusion of controversial figures causes concerns for the leadership of the president, the retention of finance minister Tito Mboweni and public enterprises minister Pravin Gordhan played a big part in appeasing market participants and certainly adds stability and continuity to the cabinet.<\/p>\n “It is now up to the president and his members of the cabinet to make good on pre-election promises and deliver on crucial aspects such as employment, economic growth and the turnaround of Eskom to ensure sustainable electricity supply,” said Botes.<\/p>\n She said that the rand expected to remain under pressure as the trade war wages on.<\/p>\n “Should we see positive feedback from the US and China, one can expect the rand to make some headway. GDP figures due for release next week is likely to cause some short term volatility, however the greater performance of the rand will continue to be determined by global factors, with poor economic data merely fueling the already fairly large fire.”<\/p>\n In morning trade on Friday, the rand traded at the following levels against the major currencies:<\/p>\n\n
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