S.A Rand Clocks Another Day of Losses as Global Trade Fears Rise; G7, Fed in Focus

-ZAR falls as Trump heads to G7 amid elevated tensions.

-Losses against GBP and USD approaching 4% for the week.

-ZAR May face Fed-related losses next week as US rates rise.  

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The South African Rand clocked up another day of losses Friday as traders shunned emerging market units and other risk currencies, in favour of safe havens like the US Dollar, as fears over the outlook for global trade rose sharply ahead of the so called G7 summit.

President Donald Trump's combative approach toward nations with which the US has a perceived unfair trade relationship has placed markets on edge in recent months, particularly after the White House targeted China, the EU, Canada and Mexico with a series of tariffs that have prompted fears of a so called trade war.

I am heading for Canada and the G-7 for talks that will mostly center on the long time unfair trade practiced against the United States. From there I go to Singapore and talks with North Korea on Denuclearization. Won’t be talking about the Russian Witch Hunt Hoax for a while!

— Donald J. Trump (@realDonaldTrump) June 8, 2018

Friday and Saturday sees national leaders from the "G7 nations" meet to discuss a range of issues, although international trade is expected to feature heavily on the agenda. Already, Canadian Prime Minister Justin Trudeau and French President Emmanuel Macron have made a number of barbed remarks at a press conference ahead of the summit, drawing an angry rebuke from President Trump on Twitter.

This sent markets into a "risk off" mood Friday, which saw the US Dollar rise broadly and while emerging market units such as the Rand and other risk currencies like the Australian and Canadian Dollars all fell during the session. A similar pattern has prevailed in currency markets throughout the week and, accordingly, the Rand has shed 3.5% against the US Dollar and 3.8% against Pound Sterling. 

Looking forward to straightening out unfair Trade Deals with the G-7 countries. If it doesn’t happen, we come out even better!

— Donald J. Trump (@realDonaldTrump) June 8, 2018

Fears are that President Trump's push to reduce America's international trade deficit, which exists because the country imports far more than it exports from the rest of the world, will hinder the flow of goods across borders and hamper economic growth in all countries that this so called "protectionism" touches. 

"The Brazilian real was ‘only' the third worst-performing major currency this week, losing 1.4% against the US dollar. The Mexican peso and South African rand, both generally more popular with investors, have suffered more. The sense of contagion across higher-yielding markets is hard to ignore. On we go to another Fed rate hike next week," says Kit Juckes, chief FX strategist at Societe Generale. 

The USD/ZAR rate was quoted 0.88% higher at 13.08 during the noon sssion Friday after having briefly traded above 13.25, it's highest level since December 2017 when South Africa's investment grade credit rating was seen under threat from a possible perpetuation of the Jacob Zuma presidency that had come close to driving the nation's finances into the ground.

The Pound-to-Rand rate was quoted 0.71% higher at 17.52, reflecting a similar six month high, which helped the exchange rate register a 3.8% gain for the week. 

Friday's price action comes hard on the heels of a series of disappointing data releases from South Africa and ahead of the June Federal Reserve interest rate decision in the US. 

"Although there was broad-based weakness in EM, the rand was one of the worst-performing currencies, as peers raised interest rates and concerns around SA's current account deficit grow. At the same time, 1Q18 GDP figures and April’s manufacturing data were disappointing," says Mpho Tsebe, a strategist at Rand Merchant Bank.

South African GDP growth collapsed in the first quarter, with the economy shrinking at an annualised pace of 2.2% when markets had expected only a 0.5% contraction. This left South African economic growth at just 0.8% for the year to the end of March, far beneath the market consensus for a reading of 1.9%.

This left a sour taste in the mouths of investors at the very beginning of the week. One which may remain a hinderance to the Rand over coming days if the Federal Reserve does as it is expected to, and raises US interest rates for a second time in 2018 next Wednesday. 

Another rate rise in the US could give the Dollar a renewed tailwind, helping it to renewed gains over other currencies, particularly if Federal Open Market Committee (FOMC) members signal they are willing to pick up the pace at which they tighten American monetary policy during the months ahead.

This would be bad for the Rand because, as an emerging market currency, it is negatively correlated with the US Dollar.

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