EDITORIAL: New tests of rand buoyancy
Trumponomics will weigh heavily on global markets — but the rand’s ups and downs in 2017 could be driven as much by our own foibles as by global geopolitical ones
A year-end happy holiday message from Rand Merchant Bank’s currency team hailed the fact that 2016 was the first year of rand gains since 2010, with the currency ending the year as the third best performing in global markets. SA’s ultravolatile currency appreciated 13% against the dollar, entering the new year at about R13.74 and recorded what the bank says was its "biggest ever" gain against pound sterling, trading early on Monday at about R16.95.
After the political roller-coaster that was 2016, it seems quite startling that SA’s currency could have performed so strongly. With 2017 set to be another rough-ride year, globally and domestically, it’s anyone’s bet where the rand could go. But at least it is not by any means a one-way bet.
Global drivers will loom large this year and for all currencies one of the largest, if not the largest driver, will be the new administration of Donald Trump and how it plays out in US economic policy. Markets will be trying to assess the direct effect of the decisions of the new administration on the US economy and hence on the global economy; for SA, the crucial questions will be about the likely effect on US-China relations and on prospects for commodities and for emerging markets in general.
Just as crucial will be the indirect effects of how US monetary policy makers respond to Trumponomics — and who the monetary policy makers will be as the president-elect starts to get a grip on appointments. The rand and other emerging market currencies tend to be extremely sensitive to the Federal Reserve’s interest rate decisions. The Fed has already signalled that it could raise rates more often this year than it had earlier had in mind, and if Trump’s policies are indeed going to be stimulatory and potentially inflationary, US rates could pick up faster than expected, strengthening the dollar and putting pressure on the rand. But we are in a new and uncharted era, and there is so much uncertainty about the meaning of Trump’s victory that it could as easily go the other way.
Almost as much uncertainty surrounds the future of the UK and Europe, with British Prime Minister Theresa May promising to trigger Brexit by March whatever the outcome of current court cases on the issue, and as yet no clear picture at all of what the UK’s exit from the EU will look like or what implications it will have for trading partners such as SA.
Sterling’s crash has taken the pound-rand exchange rate back to levels not seen since many years ago, and the question is whether this is the new and permanent level for the pound in the Brexit era. That will depend in part on what happens to the EU itself, whose fate, and that of the euro, will be centre stage as France goes to the polls later in the year, with the risk that it, too, could opt to exit. Since the EU is SA’s largest trading partner, its fortunes are very material for the rand.
But in the end the rand’s ups and downs could be driven as much by our own foibles as by global geopolitical ones. This is election year for the ANC and as the succession battle hots up, the political battlefield could get a lot uglier. But it could also bring more reason for hope if those willing to challenge the rent-seeking and state capture factions gain courage and, crucially, gain support.
The ratings agencies and market players will be watching the political nuances closely this year, just as they did last year, with a view to the implications for economic policy and the economy. Although the country managed to avert a downgrade to junk status last year, which could have pitched the economy into recession, it will have to work even harder this year to repeat that feat.
The chances are that unless SA can start to lift its economic growth rate this year and start to regain the confidence of investors, the rand will struggle to sustain its gains.