Rand 3.5% stronger – a good start to 2019

The rand has started 2019 with a bang and is 3.5% stronger against the US dollar. This is mainly the result of off-shore events, which makes this sentiment driven. And ­- as we all know - sentiment can change at the drop of a hat.  

The two main reasons for the rand’s performance in the past couple of weeks is the fact that the US Fed is becoming more dovish on its stance on raising interest rates. Fed Chair Jerome Powell has hinted in speeches that the Fed needs to be flexible in its approach and be able to react quickly to changing market conditions while having an overriding feeling of patience.

This has been positive for emerging markets (EM) as investors have moved back into high-yielding assets since the increase in interest rates from the US has halted for the time being.

The second reason for the recent optimism in EM's is the trade talks between the US and China, and the feeling that the two countries could hash out an agreement that would negate the recent tariff impositions from both sides. The recent trade spat between the countries has caused a ripple effect in the market as concern for global growth became the buzzword, and EM's came under pressure. 

However, there is enough cause for concern in the market that shows that the recent rally in EM's has the potential to turn around quite quickly. The first is the negative economic numbers out of China, with exports dropping by 4.4% - and secondly, Eurozone production numbers are down.

This will only increase murmurs about the global growth dilemma and could cause EM's to be on the back foot again. 

Furthermore, US President Donald Trump threatened to do serious economic damage to Turkey should the country use military force in Syria. The lira has been losing ground against all currencies following this announcement and we don't have to go back far in history to know what happens when the lira goes haywire.

In South Africa, 2019 has the potential to be a very volatile year due to our local elections. There will be a lot of focus on any developments that might happen before the elections and the rand can be expected to be like a yo-yo this year. There are also the credit rating agencies that will scrutinise every little aspect of South Africa that could be negative, and a reason to downgrade South Africa.

In the short term the rand will probably trade in ranges as the negative and positive forces are mostly cancelling each other out. Market data this week is the upcoming MPC meeting, but no fireworks are expected, and the view is that interest rates will be kept on hold.

Currently, the primary driver for the rand will be from off-shore events. Also, with the opposing forces at a stalemate, range trading should be at the order of the week.

To catch up on today’s market commentary, have a look at the TreasuryONE blog which is updated daily.