Markets WRAP: Rand closes at R14.97/$

The rand closed at R14.97 to the greenback on Tuesday afternoon.

While it traded mostly in the R14.75 to R14.85 range for most of the day, a press conference by Moody's on Eskom's financial woes led to increased volatility.

Nobody should be fooled. Currencies were looking a lot less vulnerable after China surprised pretty much everyone today by fixing the onshore yuan below 7 per dollar, but the rally across foreign-exchange markets was a fragile one.

In fact, only the Taiwanese dollar managed to strengthen more than 0.2% among the Asian currencies, and the Philippine peso, Indonesian rupiah and Malaysian ringgit remained weaker, occupying the bottom three places on the emerging-market scorecard.

The rand was the stand-out winner, appreciating for the first time in five days with a 0.6% gain. Stocks were even less impressed though, with China’s Shanghai Composite and South Korea’s Kospi leading the MSCI index lower for a 10th day, the longest losing sequence since June 2015. Meanwhile yield spreads on emerging-market sovereign bonds were an average 1 basis point narrower versus a rising Treasury curve.

Underlying Fear

The stronger-than-expected fixing, coupled with an announcement that the government would sell yuan-denominated bonds in Hong Kong, came after President Donald Trump labeled China a currency manipulator - hardly a sign of easing tension between the two trade-war protagonists. So the underlying fear factor is no less prevalent than it was 24 hours ago.

And that’s little comfort in the light of the increased vulnerability of emerging markets to the yuan’s moves. Bloomberg’s Netty Ismail shows in a chart today how the correlation between the yuan-dollar rate in the offshore market and the currencies of the developing economies has never been greater.

Standout Baht

Which makes the performance of the baht all the more impressive. The Thai currency, famously at the epicenter of the 1997 Asian financial crisis, has remained little changed during this month’s trade-war turbulence, while peers such as the rupee and the won have weakened more than 3%, as noted by reporters Lilian Karunungan and Suttinee Yuvejwattana in a piece today.

Anyone who’s followed the Thai story will know that the country’s authorities aren’t too happy with the current level of the baht, which Bloomberg Economics says is some 18% overvalued. Most economists expect the central bank to stand pat when it decides rates tomorrow, but the latest events surrounding the yuan might just have increased the odds of a surprise cut, as evidenced by moves in the swaps market Friday and Monday.Awkward Auction.

It’s a big day in South Africa today, with the government preparing to issue a record amount of bonds at a weekly auction as it increases borrowing to raise funds for Eskom, the struggling state power company. The timing is unfortunate though. As Colleen Goko reported from Johannesburg yesterday, yields on benchmark government debt have jumped to the highest in two months amid the current trade-war turmoil, meaning President Cyril Ramaphosa’s bailout plan for Eskom will come at an extra cost.

Poland’s Yield Moment

Poland has finally joined the world’s negative-yielding bond club. As the global stock of debt that gives holders a negative return surpassed $15 trillion yesterday, yields on Poland’s euro-denominated green bonds due in March 2029 briefly dropped below zero as they followed German bunds. As Bloomberg’s Warsaw-based reporters Adrian Krajewski and Maciej Onoszko wrote, this makes Polish Eurobonds the first from central and eastern Europe to trade at a negative yield at such a maturity. Latvia and Lithuania may be next in line. - Bloomberg

Oil steadies as China’s yuan fix alleviates trade war tensions

Tsuyoshi Inajima and Grant Smith, Bloomberg 

Oil steadied as China moved to stabilise the yuan, cooling some concerns about an escalation in the standoff with the US, which labelled the Asian nation a currency manipulator.

Futures were 1% higher in New York as the People’s Bank of China on Tuesday set the daily currency fixing stronger than analysts expected.

Crude had slumped as much as 1.8% earlier after comments by the US Treasury Department sowed fears that the clash between the two biggest economies was about to inflict an even deeper toll on economic growth and oil demand.

While the yuan fix provided some relief to investors, the US and China are still locked in a tit-for-tat spiral with no end in sight to their prolonged trade dispute. That’s pushed crude down about 6% this month and eclipsed the threat of supply disruptions from the Middle East.

Iran could step up its operations against tankers passing through the Strait of Hormuz, the world’s most important oil chokepoint, Foreign Minister Javad Zarif said on Monday.

“Global growth and oil demand prospects have oil prices on a short leash,” said Norbert Ruecker, head of economics at Julius Baer Group Ltd. in Zurich. West Texas Intermediate oil for September delivery rose 55 cents to $55.24 a barrel on the New York Mercantile Exchange as of 8:19 a.m. local time. The contract fell 1.7% on Monday.

Brent for October settlement added 42 cents, or 0.7%, to $60.23 a barrel on the London-based ICE Futures Europe Exchange. It slumped 3.4% on Monday to the lowest level since mid-January.

The contract traded at a premium of $5.07 to WTI for the same month.

While the US Treasury Department’s labelling of China is largely symbolic, with only modest potential punishments compared with the steps President Donald Trump has already taken against the Asian nation, it underscores the rapidly deteriorating relationship between the two nations.

Beijing will likely retaliate with levies on American oil imports if the White House goes ahead with putting tariffs on all Chinese goods, Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies, wrote in a note.

“The US-China trade war is worsening in every conceivable way,” said Satoru Yoshida, a commodities analyst at Rakuten Securities Inc. in Tokyo. “Even if tensions ease in one area such as tariffs, sanctions on companies or currencies, they may find another point of conflict.”

Trade war latest: Trump, China, yuan, manipulation, currency wars

Shawn Donnan, Bloomberg 

President Donald Trump has reacted to China’s move to let the yuan depreciate by branding Beijing a currency manipulator while also claiming China’s foreign-exchange strategy means it’s paying the cost of U.S. tariffs.

Break those two positions down, however, and it’s easier to understand why the trade war is spooking markets. Clashing consequences are surfacing and a potentially ominous reinforcing cycle is forming. Trump and those around him have been frustrated by China’s response to his tariffs.

By allowing its currency to depreciate through the symbolic 7-per-dollar mark on Monday, policymakers in China preemptively helped offset the cost of a 10% tariff he plans to impose on some $300 billion in Chinese imports on September 1.

Just as China’s currency swings limit the impact of Trump’s tariffs, they also feed into longstanding accusation that China guides its currency for an export advantage.

“China is intent on continuing to receive the hundreds of Billions of Dollars they have been taking from the US with unfair trade practices and currency manipulation,” Trump tweeted on Monday.

Trump also argued that the slump in the yuan proved his point that China — not Americans — pays the real costs for his tariffs, an oft-discredited claim. On Tuesday, markets stabilised as Beijing denied it’s cheapening its currency.

But the latest twists revealed a policy vortex with no easy escape: If increasing tariffs leads to Chinese depreciation, which yields complaints about tariff evasion and currency manipulation, it leads you back to more tariffs.

That’s not a hypothetical. Trump’s frustration with China’s retaliation and past currency moves is what has led to every escalation so far in the trade war. A year ago, US tariffs were in place on just $50 billion in goods from China. Now, some $250 billion in annual trade is covered by a 25% tariff. Come September 1, a 10% tariff will take effect on a further $300 billion in goods.

Increasingly, though, that looks like it may not be the end of it.

The rand was still on track to touch the R15.00 mark on Tuesday morning amid the intensifying US/China Trade War.

Treasury Partner at Peregrine Treasury Solutions, Bianca Botes said, "The trade war is once more in full swing and escalating by the day. Yesterday saw Washington label China as a currency manipulator, causing the dollar to soar against the Chinese yuan," she said.

"The rand managed to trade fairly flat throughout the day, following its initial move to above R14.90/$, witnessed in early morning trade. While the rand continues to feel the pinch, this is not the time to panic-buy foreign currency: a cool down in the global environment could see the local unit retrace to the R14.50 mark in the short term.

"It’s a quiet day on the data front with JOLTS job openings in the US being the only noteworthy item set in the calendar for release today.The rand starts the day at R14.92/$, R16.74/€ and R18.12/£.The next target still remains R15.00, with all eyes on the next move that will be made in the trade war."