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The South African Rand starts the new week at a disadvantage against most major developed economy currencies owing to a notable drop in investor sentiment courtesy of ongoing international trade war jitters.
ZAR remains subject to global sentiment under the current foreign exchange market regime and this is likely to remain the case over the course of the coming week.
Against the Pound the currency is a percent lower with one Pound buying R19.96; GBP/ZAR will be eyeing last week's high just above 18.40 again this week. The EUR/ZAR exchange rate is quoted at 15.81 while USD/ZAR is at 13.53.
Lara Hodes at Investec says both global and domestic events are weighing on the Rand's performance. "Internationally heightened trade war concerns resurfaced, as President Trump threatened additional tariffs on Chinese imports. This caused investors to retain their risk-off stance, driving the Rand, along with other emerging currencies lower."
Investec tell clients they forecast the Rand to trade in a range of 13.00 – 14.00 against the US Dollar.
Against the Euro, the expected range for EUR/ZAR is eyed as being between 15.20 and 16.20.
For the Pound-to-Rand exchange rate Investec are eyeing the 17.40 - 18.40 range to be in play this week.
The South African Rand's Week Ahead: Trade and PPI
As mentioned, for the South African Rand focus will be on broader trends and global investor sentiment. China's trade dispute with the United States matters, as will any indication that Donald Trump is intent on turning his guns on the European Union.
There has been talk of such a move, with the auto sector being tipped to be front and centre of any attack.
Why do trade wars matter for the Rand? The trade dispute has been shown to increase the value of the Dollar whenever it flares up, driving an ongoing uptrend in the Greenback. This in turn pushes higher the cost of fuels which are purchased in Dollar terms; therefore raising inflation in South Africa and slowing economic activity.
And, a stronger Dollar means that portion of South Africa's debt that is denominated in foreign exchange becomes more expensive.
"As we have stressed before, local factors are neutral for the local unit. What really matters at this point in time is the value of the US dollar and EM risk sentiment," says Isaah Mhlanga with RMB in Johannesburg. "What is possibly not appreciated is that a trade war would reduce US and global economic growth, increase business uncertainty and raise risk aversion."
Nevertheless, there are domestic issues to consider in the week ahead.
Watch PPI data out Thursday at 10:30 B.S.T. for signs of how producer prices are rising in South Africa within the context of a stronger Dollar and heightened trade tensions.
Analysts are forecasting a 0.5% rise on a monthly basis in May, taking the annualised rate to 4.4%.
Watch the trade balance numbers out on Friday, June 29 at 13:00 B.S.T. for indications on how South Africa's external position is developing, a balance of 5.9BN is forecast by analysts.
"South Africa’s budget and merchandise trade deficits will also come into focus this week as the National Treasury and SARS are scheduled to publish the data on Friday afternoon. After last week’s balance of payments of data showed a material widening in the current account deficit in Q1 18, to 4.8% of GDP from 2.9% in Q4 18, markets are likely to closely watch the May merchandise trade data for clues on how this is evolving in Q2," says Peter Worthington with ABSA.
Last week we saw ZAR dip by close on around 1.0% following the release of a worse-than-expected Q1.18 current account data (data that looks at SA's import vs. Export books) - this hints to us that trade does matter for the currency at this juncture.
So there could be a domestically-generated surprise to be wary of ahead of the weekend.
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