Sun. Oct 20th, 2019

Rand weakens following US-China trade war escalation

Over the past week we’ve seen the ZAR weaken drastically.

rand weakens following us china trade war escalation 1024x683 - Rand weakens following US-China trade war escalation

This Rand report is brought to you by Sable International

There has been speculation that the Rand would recover its recent losses, although being one of the most liquid emerging market currencies, it took knocks left, right and centre amidst heightened risk aversion.

Despite South Africa’s commodities usually benefiting in times like this, the ZAR weakened as the US-China trade war escalated. The Rand also took a knock from domestic political movement.

7f9e0938 weekly rand report graph 13 august - Rand weakens following US-China trade war escalation

Last week Monday, the ZAR declined to a seven-week
low to around R14.90 to the US Dollar mostly due to collateral damage from the
trade war spat. After Trump’s announcement that he would impose 10% tariffs on
$300 billion of the country’s goods, Beijing warned it would hit back at
Trump’s threat. The Chinese let the Yuan weaken to the lowest it’s been in a
decade, above CNY7 to the US dollar. This has led to mass speculation that
China is allowing the currency to depreciate, with the US calling this a new
“currency war”.

Late on Tuesday afternoon, Moody’s
announced Eskom needed an urgent turnaround strategy and that it would require
significant external support, and by Wednesday the Rand had weakened to R15.11
to the US Dollar.

Midweek, New Zealand’s central bank reduced
interest rates by some 50 basis points. Overall, central banks of the world
have been shifting to a more dovish tone, cutting their interest rates to react
to slowing global growth. This large cut by New Zealand surprised the market
and saw the NZD weaken by about 2% against the GBP, later regaining some of the
grounds lost.

On Thursday, Minister Jackson Mthembu said
the government has no plan to approach the International Monetary Fund (IMF)
for assistance. This standoffish stance by the government, together with the
state of the economy and the unemployment stats, caused the ZAR to take another
hit on Thursday afternoon. Our deterioration into junk status could be complete
soon if Moody’s pulls the trigger – the next credit rating review is scheduled
for 1 November 2019.

As the new week began we saw the ZAR weaken
substantially, hitting a low of R18.68 to the Pound and R15.46 to the Dollar.
This move comes partially due to an escalation in trade war rhetoric as well as
an emerging market selloff after a surprise election result in Argentina, which
lead to the Peso weakening 33% in one day.

On the data front this week we have both US and UK inflation data. Any uptick in these would result in a strengthening of those currencies. Overall, with the current risk-averse stance in the market one should be sure to monitor movements closely, as volatility will be extremely high.

Market
event calendar:

Tuesday 13 August

  • UK average hourly earnings
  • US CPI data

Wednesday 14 August

  • UK producer price data
  • EU GDP data

Thursday 15 August

  • US retail sales data

– Sheena Hobden

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