Rand spikes on Nene comments, renewed trade war fears

Cape Town - The rand's weakening of over 1% to the US dollar just after noon on Monday has economists puzzled.

At least one analyst attributed the spike to a knee-jerk reaction to comments made by Finance Minister Nhlanhla Nene on Monday morning.

By 12:53 the local unit was trading 0.85% weaker at R12.13, after hitting an intraday low of R12.15/$.

RMB economist Isaah Mhlanga told Fin24 by phone the one possible reason for the rand's sudden move to R12.15 was "an irrational reaction" to statements made by Nene. 

According to Bloomberg Nene told city managers at a seminar in Johannesburg on Monday that South African municipalities need to be pulled back from the brink of financial ruin.

He said some South African cities are "on the brink of collapse" and "can’t be allowed to fail".

Mhlanga said the local currency was likely not reacting to economic data out of the US, as major releases are only expected on Monday afternoon. He said the rand would likely start strengthening back to the R12/$-level.

NKC African Economics economist Gerrit van Rooyen blamed disappointing euro zone investor confidence data and renewed trade war fears for the rand's decline.

He told Fin24 in an emailed response that the rand had managed over the weekend to claw back some of its losses last week thanks to weaker-than-expected US payrolls data, which led to broad US dollar weakness.

A tweet from US President Donald Trump on Sunday that he expects China would "take down its trade barriers" had also eased some trade war concerns.

"However, emerging market currencies came under pressure again today following disappointing euro zone investor confidence data and comments by the Chinese foreign ministry that trade negotiations with the US are impossible 'under the current circumstances', which renewed trade war fears," said Van Rooyen.

Bianca Botes, Corporate Treasury Manager at Peregrine Treasury Solutions, said good data coming out of the US was driving dollar strength.

On the other hand, expectations of conflict between the US and North Korea, as well as trade tariff disputes between the US, China and the EU, are resulting in a selloff of emerging market assets. As a consequence emerging currencies are depreciating.

"The rand has been expected to weaken to closer to fundamental levels and the current pace that we are seeing stems from the 'risk-off' environment. Investors are positioning themselves to have liquidity as well as a safer haven compared to South Africa and other emerging markets at the moment,"she said in an emailed response.

Botes added there is not much local data supporting the rand at the moment. The Business Confidence Index declined while inflation is expected to rise as a result of the 1% hike in VAT and the slightly weaker rand.

"There thus are certain structural elements that are putting pressure on the rand – overall on both the political and economic fronts the country has been quiet and we are still lagging the rest of the world in terms of an economic uptick – but mostly, the rand weakness being driven by a global selloff of emerging market assets."

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