Rand falls to 7-month low as US-China trade war escalates

The rand fell to its weakest in nearly seven months on Tuesday and government bonds weakened sharply as US President Donald Trump threatened new tariffs in an escalating tit-for-tat trade war with China, hitting sentiment in emerging markets.

The rand led the losses in emerging market currencies as sentiment was also weighed by concerns over the domestic economy after a string of poor economic data and power outages following protests over wages at national electricity provider Eskom.

The rand fell to R13.84 to the dollar, its lowest since November 27, surrendering all off the gains it made since President Cyril Ramaphosa was elected head of the ANC in December.

The sharp global risk-off came after Trump threatened to impose a 10% tariff on $200 billion of Chinese goods and Beijing warned it would retaliate, in a rapid escalation of the trade conflict between the world's two biggest economies.

“The rand is likely to remain volatile for the rest of second quarter 2018 and third quarter as it remains at risk from heavy portfolio outflows,” Investec chief economist Annabel Bishop said.

“Added to this, is that South Africa is already disappointing investors with heavily indebted Eskom's threatened load shedding and wage demands ... the (first quarter) contraction in GDP and South Africa’s twin deficits where little work has been done so far to meaningfully reduce government debt and expenditure to date.”

Africa’s most industrialised economy suffered its worst quarterly GDP contraction in nine years in the first quarter, and last week embattled Eskom began the first country-wide controlled power outages since 2015.

The central bank will release first-quarter current account numbers on Thursday. Economists polled by Reuters expect a wider current account deficit of 3.8% of GDP compared with a 2.9% shortfall in the final quarter of 2017. In fixed income, the yield for the benchmark government bond due in 2026 was jumped 9 basis points to 9.19%, reflecting weaker bond prices.

On the stock market, the Top-40 was down 1.06% at 50,465.84 while the broader all-share was 0.99% lower at 56,668.57. – Reuters

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