South African Rand Benefits from Trump Tremors

The South African Rand has enjoyed a decent run in recent days as investors seek out higher-yielding assets amidst a decline in yield on US Treasuries.

South Africa’s Rand and other 'risk currencies' appear to be benefiting from the instability in the US political excutive, a dynamic that at first appears strange.

The Rand has risen against the Pound, Dollar and Yen over the past week "the Rand has suddenly gone from underperformer to outperformer,” says John Cairns, an analyst with RMB in Johannesburg.

Cairns describes the appreciation in ZAR as "the bizarre consequence" of political instability surrounding US President Trump benefiting risk currencies which would typically slide in such an environment.

Trump has this week threatened to shut down the government if he does not get funding for the building of a wall across the Mexican border. 

The threat reminds investors of the volatile brand of politics Trump has brought upon the country and this does not play well amidst mounting fears over the US debt ceiling.

Congress reconvenes on 5 September and has 12 days to act to stop a government shutdown. This all raises questions about the tax agenda.

"Add in some bad US housing market, and you see treasury yields dropping sharply," says Cairns.

Falling treasury yields only makes the yield on South African government debt all the more attractive which has triggered the kind of flows needed to bid the Rand higher.

The moment Trump is impeached or resigns the dollar will have a massive rally. Until then the market is hostage to his rants.
USD

— Boris Schlossberg (@Fxflow) August 24, 2017

However, the Rand's strength is by no means a runaway train amidst a fall in July inflation, from 4.7% to 4.6%, borne out by data released on Wednesday.

This, coupled with South Africa having fallen into a technical recession during the second quarter, has implications for monetary policy at SARB.

“Yesterday’s inflation print was in line with our expectations, leaving our view – that the SARB will cut rates in November – unchanged,” wrote Carns.

The South African central bank cut its benchmark interest rate, from 7% to 6.75%, back in July.

The move followed a series of hikes that had pushed the cash rate up by 200 basis points, from 5% at the end of 2014, themselves measures designed to ward off rising inflation and currency weakness brought about by domestic politics.

President Zuma still faces investigations into more than 80 allegations of corruption. He has long been at the centre of controversy for his handling of the South African government and his relationship with a wealthy Indian family, the Guptas, who some have accused of attempted “state capture”.