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Cape Town – US President Donald Trump’s health care reform failure and strong Eurozone data saw the rand lead emerging markets to reach new highs as the US dollar weakened across the board.
The rand was trading at its strongest levels since June 2015, at one stage reaching R12.3146 to the dollar in morning trade on Monday.
Trump and the Republican party had aimed to repeal former president Barack Obama’s signature Affordable Health Care for America Act, known as ObamaCare. They were then going to enact the American Health Care Act, known as TrumpCare.
However, a faction within the Republican party refused to vote "yes" on the bill and so House Speaker Paul Ryan – who drove the bill – convinced Trump to pull it from being voted, a move that would have humiliated the White House and the Republicans.
Rand Merchant Bank analyst John Cairns said it was the euro/dollar currency that drove the currency markets, including the rand.
“The failure of the US health bill could have been seen as negative for all ‘Trumpflation’ trades, including the rand, but risk assets have not been overly concerned,” he said in a market note on Monday.
GRAPH: Weekly rand/dollar movement from 2015 to 2017
Source: Bloomberg
“Despite some equity market losses on Friday, and probably some more today, there has been no major fallout — the market clearly is not too fretful that the failure of Trump’s policies on health necessarily show that his all-important-for-the-market reform on taxes will struggle.
“Dollar weakness post the bill’s failure and euro strength on continued strong eurozone data has seen the pair push to a new high for 2017, up at €1.0850/$. This move has allowed ongoing dollar/rand downside, but kept euro/rand contained.”
The failure “is not solely influencing the forex market per se, but rather detracts some attention away from the market movers such as the Fed for now”, explained TreasuryOne dealer John Moni in a market note on Monday.
“With the health bill taken out... briefly, it paves the way for attention towards the tax and government spending bills, which are next on the agenda for Trump.
“With last week’s performance in mind, one can only say that the rand has done phenomenally well having broken through a few significant support levels,” he said. “This latest round of emerging market gains is definitely being led by the rand.”
Apart from the US health bill, Cairns pointed to other market movers. This included the Organisation of the Petroleum Exporting Countries extending its production cuts for another six months beyond the end of the year.
It also included the minutes of the last Bank of Japan meeting that show policy will remain easy for some time, but “fears that Fed hikes indicate policy is going to be tightened everywhere look off the mark”.
This week Cairns said the triggering of Brexit Article 50 on Wednesday “will get huge attention, but this is already priced”.
Domestic focus will be on the SA Reserve Bank’s monetary policy committee (MPC) meeting, where it is expected to keep the lending rate at 7%.
RMB’s forecast is for two 25 basis-point cuts this year in May and September, “but we may push this out depending on the tone of the MPC’s statement”.
