Tariff Troubles

What we know

 

A fairly busy week from a data and news release point of view is behind us, and for the second consecutive week, we’re happy to say that it was another positive one for the Rand.

Things looked a little shaky on Monday, however, as the market reacted negatively to the latest round of tariffs to be imposed on China by the US, with another $200 billion of Chinese goods being assigned 10% tariffs. Of further concern was the statement that these tariffs will be increase to 25% next year and, should China retaliate, an additional $267 billion of Chinese imports would be impacted. Attempting to look on the bright side, one would hope that if, and hopefully when, this show of bravado by both parties calms down, that general global sentiment could only improve.

At the same time the Turkish Lira found itself heading back towards the levels seen just prior to last week’s rate hike, increasing concern around that currency and emerging markets in general.

All this meant was that the ZAR, having reached as low as 14.63 last Friday, threatened to break through the 15-level again on Monday. Fortunately though, as we had hoped, the market found resistance at that level and soon moved back into the 14.82-14.95 range until early Wednesday morning, during which the ZAR gained another 1.5% towards the 14.62 lows of last week. The rally was attributed to a combination of slightly softer inflation figures locally, combined with broader emerging market gains. We also felt that the move was at least partly due to the market positioning itself for a hike at the MPC’s rate decision on Thursday afternoon. Indeed, the market had gone from only recently pricing in very little chance of a rate hike, to a 50/50 chance shortly before the announcement.

In the end it was a close run result, with 4 of the 7 committee members voting to hold rates constant, with the rest in favour of a 0.25% hike.  One really would not envy being in Governor Kganyago’s shoes at the moment, as it really is a case of choosing between the lesser of two evils:  hiking rates and potentially threatening growth further or holding things steady and thereby leave the ZAR relatively less attractive to foreign investors from a yield perspective, in the face of rate hikes elsewhere. Needless to say, the focus will now shift firmly to the November decision, with local economic releases being very keenly watched indeed over the coming months.

In hindsight the market pricing in a hike may not have been a contributor to the local currency’s rally, given the ZAR strengthened further after rates remained unchanged. At the time of writing the Rand is at 14.28 against the USD, its best level in over 3 weeks; however, it must be noted that the USD itself is under some pressure, having lost 1.2% this week against its major trading basket, to trade at 2 month lows.

 

What others say

 

17 September 2018

Nedbank – Still A Correction Within A Bear Trend

“With EM pressures easing somewhat, and a hawkish SARB, we expect the tactical correction in the rand, within a broader bear trend, to continue. We can expect a rally from current levels to R14.60, possibly extending to R14.10.

We recognise that currencies tend to over shoot in the near term, both to the upside and downside, driven by external liquidity factors. As pointed out before, daily forex turnover for the rand as a percentage of annual GDP is a staggering 18%, but SA trade is only less than 1% of global trade volumes. A weaker US dollar in the short term will likely support this view, also as the rand and other EM currencies seem to be over sold in the short term.”

CNBC – Trump Will Slap 10% Tariffs On $200 Billion In Chinese Goods – And They Will Go To 25% At Year-End

“Trump, in a statement, said that the tariffs would rise to 25 percent on Jan. 1, 2019, adding that “if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.

Trump has previously said that those additional duties are “ready to go on short notice if I want.”

The action will only ratchet up tensions between Washington and Beijing. The president seeks a new trade agreement amid complaints about alleged theft of intellectual property by Chinese companies and concerns about the US trade deficit with China. The two sides have failed to reach a deal to resolve the White House’s concerns with China’s trade practices despite a series of talks.”

18 September 2018

RMB Global Markets Daily – Morning Report

“Yesterday, the US announced it will levy 10% tariffs on additional Chinese imports worth US$200bn effective from 24 September. The new tariffs come as the two nations were preparing to engage in fresh talks to end the ongoing trade dispute. However, the new tariffs have cast doubt on any trade deal being reached.

The latest set of tariffs along with the taxes already in place on US$50bn worth of Chinese imports now account for close to half of total imports from China. It is still unclear how China will respond to the new tariffs given that the US exported about US$130bn goods to China in 2017 – limiting their capacity to go tit-for-tat. While the latest set of tariffs will affect some consumer goods, the initial impact might be partially offset by the depreciation in the renminbi. However, Trump has threatened to impose additional tariffs on US$267bn in Chinese goods if China retaliates, which is likely to have a bigger impact.”

19 September 2018

EWN – Rand Firms On Emerging Markets Rally

“The rand strengthened against a softer dollar early on Wednesday as expectations that Beijing would implement stimulus to reduce the economic blow from the Sino-US trade war boosted invest or appetite for emerging markets.”

Business Day – Rand And Local Bonds Extend Rally On ‘Technical Correction’

Earlier, the rand broke through R14.65 to the dollar for the first time since the end of August, with the market taking the view that the it had been oversold. It is, however, still 18% weaker for the year, but is some way off its worst level of R15.69, reached on September 5.

Moneyweb – Rand Gains With Bonds As Inflation Eases

“South Africa’s rand headed for its biggest gain in a month as an unexpected inflation slowdown spurred traders to readjust their outlook for interest-rate increases, rekindling appetite for the country’s local-currency bonds..”

20 September 2018

Bloomberg – South Africa Holds Rate As Recession Trumps Market Turmoil

“The South African Reserve Bank held its key interest rate at a two-year low as the economy struggles through are cession and policy makers warned that investor sentiment toward emerging markets is a risk to the currency and adds to inflation pressures.

The Monetary Policy Committee voted to hold the repurchase rate at 6.5 percent Thursday. Three of the MPC’s seven members votes to increase the rate by 25 basis points, a deviation from the July and May decisions, which were unanimous for holds.

What we think

 

Last week we wrote that “we believe that the Moody’s comments, even if only a temporary reprieve, should alleviate immediate panic and perhaps provide the hitherto elusive catalyst for a bullish ZAR-view in the short-term.”  While trying to draw the precise line between cause and effect in currency markets is very difficult, we do believe that relief around the Moody’s statement has helped ZAR sentiment improve.

The sell-off over the past 6 weeks came in the face of Turkey’s troubles, land reclamation issues, weak GDP, Argentina troubles and China-US trade wars. It’s hard to suggest that any one of these specific issues has been resolved to any degree.  As such we go back to our previous assertion, certainly in the mid to high 15’s, that the weakness had been overdone as nervousness and volatility spiked.  While we would not be uncomfortable with the ZAR trading in the 13.50-14.00 region, we are now reaching levels of potential support around 14.10-14.20, where we had consolidated prior to the blow-out which started on 29 August.

As such (and as always, in the absence of any unforeseen news or shocks) we would now anticipate a period of consolidation, with our range for the week ahead being 14.10 – 14.65.

 

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Have a great weekend!