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Some Good for South African Rand in Trump's Economic Proposals

Trump heads for victory, south african rand battered

Donald Trump's victory in the US Presidential Election could actually turn out to be beneficial for the ZAR in the long-run.

ZAR was an all-out loser of the sudden market repricing of a Donald Trump Presidency as it fell in tandem with other high-yielding emerging-market currencies and commodity prices.

Initial news that Trump won Ohio and then Florida really put the pressure on the Rand and its bretheren as markets went into a Brexitesque bout of panic.

Clinton was supposed to win remember!

“Amongst the CEEMEAs, the South African Rand is leading losses followed closely by the Turkish lira and the Russian ruble. All those currencies are high yielders and usually react the most to a shift in market sentiment to risk-off mode, especially the rand and the lira,” says Piotr Matys at Rabobank in London.

The GBP to ZAR exchange rate rocketed higher by over 4% to 17.31 at one stage.

The US Dollar to Rand rate rose to 13.64 while the Euro to Rand exchange rate hit 15.36, an eye—opening surge of 5.42%.

However, the subsequent victory saw markets reverse the move with an assured press briefing by Trump calming market nerves.

Of note, markets are seeing a big stimulus package - to the tune of over $500BN or so should Trump get his way - as being supportive to both inflation and economic growth.

"Stocks have continued their ascent this morning, as the initial market freak-out proved ill-founded, with the risk-off sentiment soon flourishing into an all-out risk rally," says Joshua Mahony at IG, the spreadbetting company and brokerage based in London.

In short, the ZAR likes risk-on and that is what markets are interpreting the Trump victory as being supportive of the dynamic.

What's more, Trump offers some eye-opening proposals on taxes with corporation tax set to be cut from 35% to 15%.

"While Trump’s controversial rhetoric with regards to immigrants and Muslims stole the headlines, he is predictably very pro-business, promising lower income and corporation taxes. Regardless of who builds the wall, Trump promises it will be done and this seems to be just the tip of the iceberg in the midst of a whole raft of infrastructure projects, boosting growth and employment," says Mahony.

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Trump Could be Good for the Rand

A period of frantic infrastructure investment in the USA would certainly be benificial for global commodity prices - enter the Rand - one of the more notorious 'commodity currencies' out there.

"We spent some time yesterday relooking Trump’s various proposals. It stands out that there is a lot that could prove good for South Africa," says John Cairns at RMB. 

South Africa could certainly do with a boost in global demand for its mining produce.

Recent data shows that on a quarterly basis, mining production rose by 1.5% seasonally adjusted in Q3.16, compared to the rise of 4.8% seasonally adjusted in Q2.16.

"For the remainder of the year, mining production is likely to remain restricted by relatively weak global economic growth prospects. Recent forecast updates by major international authorities, such as the IMF and World Bank, place this year’s global growth and global trade momentum at the slowest since the 2008/09 global financial crisis," says Annabel Bishop at Investec.

While ZAR could benefit from a pickup in commodity demand, the US Dollar is also being touted as a long-term winner, which could limit any advantages given to ZAR.

Greg Anderson, Global Head of FX Strategy at BMO Capital cites two reasons why Trump is likely to be good for the Dollar:

"Trump’s proposed re-write of the US tax code could bring a big shift in USD fundamentals. Reducing US corporate taxes and closing loopholes has the potential to dramatically alter the competitiveness of American business and therefore the long-run equilibrium of the dollar.

"Without knowing all the details on the loophole closures, it’s hard to be definitive, but we  tend to view corporate tax reform as long-run positive for the USD.

"The President nominates appointees to the Fed’s Board of Governors as openings occur. The next President will nominate the successor to Janet Yellen as Fed Chairman when her term expires in January 2018. Trump would appoint mostly Republicans, who tend to be more hawkish than Democrats, although there isn’t a perfect mapping of that issue.

"The Fed’s rate path in 2017 probably wouldn’t be different under Trump, but over the span of several years, a FOMC that is gradually staffed with more hawkish members would likely to result in higher Fed base rates. This would be a USD-positive factor during the period the rates market priced it into forward curves."

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