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Trump's trade war: What does it mean for the rand?

Apr 10 2018 17:06
James Paynter

IT HAS been brewing since Trump's election. 

Trade war is always feared. It's messy, souring for international relations and potentially destructive to countries caught in the middle of it. 

Worst of all, all it needs is a spark to start it. 

And Trump's "America First" strategy was always going to result in something along these lines. 

But realistically, who can blame him with a US trade deficit and global debt at such ridiculous levels, and US-China trade tariffs at such inequitable levels (e.g. 25% China tariffs for US vehicles versus 2.5% US tariffs for Chinese vehicles)? 

But what we really need to look at is the effect this has on other, smaller countries. Countries such as South Africa, which have no real interest in Chinese and US relations, but are affected by the aftershocks of major players in the global economy clashing with one another. 

This affects the rand too - obviously. But as you will see in the review below, this is all merely a piece of the big puzzle of what moves the rand, and how you can anticipate the market's next moves regardless of what goes on globally or locally. 

The week started a little late for most, as Easter Monday was observed. Our forecast giving the outlook for the few days ahead, which normally would have been released on Friday, was released late on Monday. We predict a move lower before rising strongly, targeting R12 to the dollar and above.

RAND

Apart from trade war news, there was a lot more of interest from the week, such as the following:

  • Jacob Zuma in court - who would have thought this would happen just six months ago? The case was postponed until June, but justice appears to be coming fast.
  • US jobs - for the first time in a long time, US jobs data came through much lower than anticipated.
  • Woeful JSE in Q1 - a near 6% loss for the JSE during the first quarter of 2018 - not a great start to the year.
  • VAT - the 15% value-added tax has kicked in - now to see what the effects will be.
  • Russia and USA - the global juggernauts were on tenterhooks again, as US sanctions resulted in a Russian retaliation - followed by a US retaliation to the Russian retaliation! Is it just me, or is this getting messy?

With the week really beginning on Tuesday, it was a trending week for the rand, as it steadily lost value the whole week, resulting in it pushing into the clear, over R12/$, once again. 

The market has flirted with the R12/$ level for some time, but as we hinted in last week's issue, this was soon going to change - which it did, pushing strongly higher.

LOSS

So, a tough week as the market lost 21c between the low on Wednesday and the high on Friday. But it was not all bad news.

An interesting piece in Moneyweb showed the South African bond market to have gained an impressive 8.05% in a single quarter, making it one of the most lucrative investments from that quarter.

And this was despite the extremely tough period the JSE had experienced, where it effectively lost 6% - the article was citing a fading political and economic risk in SA as the reason for this growth. 

Fading political risk is perhaps seen as Mr Zuma finally getting his day in court, albeit in two months' time, but what needs to be seen is that the problems go far deeper than just him. He was merely the symptom of the disease. 

So, while it does look like he will eventually be caught and get his dues for the 783 charges that are being reinstated, it is perhaps bordering on ignorant to say that the political risk has disappeared. Anyway, at least he has to pay for the State of Capture report!

Now, the feared trade war. To recap what we have seen in a Wimbledon-like start: 

  • The US throws the ball up, and strikes the first serve - a large tax on Chinese steel and aluminium was imposed.
  • China slams the return into the US court - on Monday, tariffs were announced on a host of around 120 US products, including apples and pork. The Dow takes a tumble.
  • The stakes are becoming higher. Both sides sense a tough battle ahead.
  • The US threatens a cross court slam - a proposed $150bn in tariffs, or rather taxes, on goods and services that the Chinese sell to the US.
  • The Chinese cover the cross court shot - with threats of tariffs on $50bn of US goods. It was looking like a cliffhanger.

And one that could go on for some time.

An interesting article shows what the United States and China each stand to lose, and who will be best at playing the long-term game in this. 

However, what many of us are looking at is what the local effect would be on a currency like the rand. 

Well, it is tough to say. 

Many say that the oil price is closely linked to the movement of the rand, since the year 1990. And with an expected oil price weakening during the possible trade war, this could be detrimental to the ZAR.

However, we can't agree with basing market direction off that.

And if you look at historical correlations with all these claims, with each one you will find periods when they seem to move together, and other periods when they are inversely related. 

These are just merely a piece of the big puzzle, because markets are moved by social mood - by mass human sentiment. 

And it is this sentiment that dictates how people perceive events. 

And it determines how they react, when a key trigger event happens. And it is therefore impossible to say that the rand will react in one way if the news is positive, and another if the news is negative.

This is because the same news can be seen as positive or negative - depending on how I perceive it - which is based on my emotions (and those around me) at that point in time!

Anyone will find, if they just take a little time to look, that there have been strange reactions from the rand over the last few years to major political/ economic events. 

Markets do not respond as you may expect - or as your average economist or currency dealer expects. 

For them, it was supposedly a week of wait-and-see for the rand

Yet what happened? It weakened significantly in the days following. 

This would have caught many off guard, especially when US nonfarm payrolls came out significantly lower than expected (which should have been dollar-negative).

Yet by simply following the patterns of sentiment, we had this move taped - before it happened.

Below is a copy our forecast published on Wednesday (with the rand trading at 11.87 at the time of the forecast), predicting a move up into the 12.0700 to 12.1300 area.

This it duly validated by touching R12.09/$ on Friday. 

Right slap-bang in the target area! 

    

So, as a globally volatile week comes to an end, we have learned a few things for certain: 

  • Don't trust the economists' outlook.
  • Don't trust your gut feel in financial markets.
  • Don't look to events for market direction.

What you need is an objective, scientific-based view - quality information, based on a proven system with a consistent track record. Let's take this into the new week with us.

The week ahead (April 2-6 2018)

The week has started with the rand firmly on the back foot, hitting two-month highs. 

So where to now? Simply put: Expect increased volatility in the days and weeks ahead. To reiterate, this is not the time to be flying by the seat of your pants, trusting economist views or looking to events for direction.

You can get hurt that way - badly. So how do you protect yourself from making wrong decisions at these points of extreme sentiment, whether positive or negative?

By making sure that you have an objective, scientific-based view of the market that enables you to make educated, informed and rational decisions, instead of emotionally-charged irrational ones (which we will default to every time).

Get more info and insight into the rand here.

* James Paynter is a financial market analyst and founder of Dynamic Outcomes. Opinions expressed are his own.

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donald trump  |  us  |  markets  |  currencies  |  rand  |  trade war
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