US Midterm Election Week

What we know

 

Eyes were firmly set on the US midterm elections this week, given the impact the results would have on Donald Trump’s remaining term in office. The midterms were labelled as a ‘referendum’ on Trump, and given the US president’s knavery of late, voter turnout was estimated to be the highest in recent years.

The week began with the Rand under relative pressure, following the cautionary wait for the results to start trickling in. Before the voting started, the Republicans held the majority in the Senate and House of Representatives. This has enabled Trump and his party to plan policies largely unabated, which included the highly polarising decision to build a wall along the Mexico border, amongst others.

Indications of the vote count pointed to the Democrats gaining control over the House of Representatives, with the Senate remaining under Republican control. This is significant for several reasons, as apart from curtailing controversial Republican plans, it will also enable the Democrats to launch investigations into the Trump administration, as well as him personally.

The Rand led the emerging market sentiment gains, off the back of this ‘split’ Congress reality. We saw it break the 14 level to the greenback for the first time in two months, moving to lows of 13.86 overnight on Wednesday. The Sterling tracked a similar trajectory downwards, bottoming out around 18.20 over the same time period.

Also to note, the FOMC meeting on Thursday confirmed the markets expectations of US interest rates being held constant by the Fed, whilst their statements around economic activity continuing to rise, albeit at a slower rate, point to another rate hike in December. The market’s initial digestion of the result turned from then onward, possibly due to the hype abating, with the ZAR retreating to 14.29 at the time of writing.

 

What others say

 

05 November 2018

Reuters – South African Rand Weakens As Risk Sentiment Dims

“…South Africa’s rand traded weaker against a softer dollar early on Monday, giving up its recent gains following fears of faster rate hikes in the United States… While the Federal Reserve is not expected to raise rates at its policy meeting on Wednesday, economists believe October’s strong labour data could see the central bank signal a December increase and tighter US monetary policy throughout 2019.”

06 November 2018

CNBC – Why US Midterms Are Putting Pressure On South African Rand Ahead Of Elections

“The Rand remained under pressure as markets favoured caution ahead of US midterm Congressional elections, as policy decisions that could sway the economy, corporate decision-making and consumer spending hinge on the results… Emerging market assets will likely respond inversely to movements in the US dollar after the elections…”

07 November 2018

Bloomberg – Emerging Markets Rally As Midterm-Elections Result Saps Dollar 

“Investors are going to be relieved to have mid-term election news out of the headlines,” said Hannah Anderson, a global market strategist at JP Morgan Asset Management in Hong Kong. “Still, nothing’s going to change on the trade front. Fears and sentiment about trade are going to continue to be reflected across the EM complex, at least for the next couple of months,” she said.

Reuters – Emerging Markets Shares And Currencies Gain After US Midterm Results As Dollar Eases

“A dip in the dollar due to reduced expectations of more pro-business policy moves by Trump, which might soften the case for further rises in US interest rates in the future, also benefited a number of major emerging currencies.”

Bloomberg – May Invites Ministers To Read Nearly-There Deal: Brexit Update

“UK Cabinet ministers have been invited to read the almost-complete draft of the Brexit withdrawal agreement, according to six people familiar with the situation. May told ministers on Tuesday to get up to speed on everything that’s been agreed so far, according to one of the people. They’ve now been invited into the Cabinet Office to read the draft text. It doesn’t yet include the final clause on the Irish backstop, according to one of the people.”

08 November 2018

Business Day – Rand Gains As Markets Cheer US Poll Results

“Since dropping to a 2018 low of R15.70 in early September, the rand has gained 11%, reducing the risk that it will add to inflationary pressures or prompt a more hawkish stance from the Bank’s monetary policy committee, which has a mandate to keep inflation at between 3% and 6%… Investec expected the rand to average R13.70 in the fourth quarter of 2018 as sentiment towards emerging markets improved and a lessening in the chances of a full-blown trade conflict between China and the US, the world’s two biggest economies, chief economist Annabel Bishop said. She said riskier assets typically found favour in the fourth quarter.”

The Washington Post – Federal Reserve Keeps Interest Rates The Same, But December Hike Likely

“The Federal Reserve opted not to change interest rates Thursday but hinted that rates are likely to rise in December….The U.S. interest rate is currently in a range of 2 to 2.25 percent, but the Fed has signalled it wants to gradually raise rates in the coming months to 3 percent or slightly higher. A rate hike is widely expected at the Fed’s next meeting on December 19, and the Fed has indicated it is likely to do three more increases next year.”

What we think

 

Last week we wrote that “It’s been a fairly common theme in our weekly comments of late and we once again put forward our view, that the ZAR appears poised for further gains.  Our range the week ahead is 14.10 – 14.45 and we are starting to feel that, if challenged again soon, the 14.10 level may finally give.  This in turn could very well lead to a first serious test of moving through 14.00 and into the high 13.00’s.”

As noted, the 14 level broke and we saw the ZAR print lows of 13.86 after hours on Wednesday this week.

As the dust from the midterms settles, something worth following is the Democrats stance on the US-China trade war, given they have been largely supportive of Trump’s Republicans stance to date, which has been one of the largest drivers of ZAR weakness. However, given the Democrats now represent a roadblock for fiscal policies like tax cuts and deregulation that previously helped buoy the dollar, we could see the prominent focus on the US growth story losing slight impetus.

From a technical perspective, we have witnessed a relatively substantial retracement after a considerable gain in the ZAR. However, we still feel as there is potential for further strength in the Rand over the medium term to get back to sub 14 lows.

Our range for the week ahead is 13.90 – 14.50.

 

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Have a great weekend!