Rand vulnerability exposed in trade war volatility.

Rand vulnerability exposed in trade war volatility.

Munozovepi Gwata  | Aug 21, 2019 07:16

The trade war between the United States of America (U.S.A) and China has been augmenting warning signs of a possible global recession. This has subsequently had an adverse effect on several financial markets across the globe, and South Africa's markets are no exception. The South African financial markets have been caught in the cross fire and subsequently the South African Rand is the collateral damage.
The performance of the American economy, South African economy and Chinese economy after the trade wars started.

The Rand has depreciated by more than 6.0% over a respectively short period of time, and the trade war can be considered as the instigator which is highlighting the existing internal economic problems in South Africa. The South African economy is still tainted with corruption scandals that we are seeing played out in the public eye. A lot of evidence has been curated in state investigative commissions, that have confirmed the abuse and mismanagement of state owned enterprises. This is of great concern, particularly as the decisions of credit rating agencies on South Africa’s economic status is heavily influenced by the performance of state owned enterprises. For example the prominent global rating agencies have issued a warning that if state owned enterprise Eskom does not have a successful turn around, the economy will be further demoted to junk status. Some credit ratings agencies have delayed updating South Africas’ rating in hopes that the government will be able to rectify and address some of investors concerns. However, in spite of this some economists argue that the global financial markets have already downgraded the South African economy to “junk status”.

The American Dollar is currently trading around R15.30 against the South African Rand, and the next resistance level is around R15.80. We have not seen the Rand break this level since 2016, and this will be a good level to watch closely. If this resistance level is significantly broken it will be an indication of a potential further plummet for the Rand towards the next resistance level around R17.70. However, the Rand is very volatile and may even recover, and an indication of this would be if it starts to trade significantly below the support level formed around R14.49. The movement in the USD/ZAR will be heavily influenced on the significant economic and political events to follow.
The resistance and support levels of the USD/ZAR.

The more recent development is the International Monetary Fund (IMF) has started signalling South Africa to act with urgency pertaining to its economic recovery. If the IMF steps into the South African economy through a financial bailout, this will have a possible short term adverse impact on the Rand , and we could see it plummet even further. Credit ratings for South Africa are always pending, and if this economy is to experience another economic downgrade the Rand will be the first victim. In addition to this a downgrade could further negate South Africas ability to attract foreign investments. If this was to happen it could potentially eclipse any plans for economic growth, which is critically needed as the South African economy is experiencing a shrinkage, high unemployment, and higher government expenditures that will be incurred by the new National Health Insurance Bill.

If the South African economy was better positioned by not experiencing such aggravating economic problems internally, it would perhaps be effective in mitigating the impacts of the US-China trade war. Particularly as South African trades (exports) are better protected against high tariffs because they are facilitated under the African Growth and Opportunity Act (AGOA) and therefore, unlike Chinese trades they are not in the direct frontline of high trade tariffs.

The future performance of the South African economy is heavily correlated with the governments next steps and responses to future economic events, and any missteps will be emphasised by the current global economic condition created by the US - China trade war.

Munozovepi Gwata

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Muyiwa Amuwo
Muyiwa Amuwo

Great article. I see the Rand reaching that 17.00 resistance to be honest  ... (Read More)

Aug 22, 2019 04:25 GMT· Reply
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