Key points:
- President Trump’s tariff stance threw global policy into disarray. The threat of counter-tariffs and the adoption of anti-America policy positions threatened to upend the global order. Policy uncertainty rates have surged higher, and the USD retreated off its highs. How much further this goes will depend on how successfully countries renegotiate trade terms with the US and reduce the final impact of the tariffs.
- However, for all this global uncertainty, the ZAR has performed really well and is now the third best performing emerging market currency this year out of nine monitored, beaten only by Mexico and Brazil. This is a huge turnaround from the sharp plunge in April when investors feared the GNU would break down. While the GNU remains fragile, it is encouraging to see political parties working towards a third budget that will tackle SA’s fiscal shortfall without relying on a VAT hike to plug the R75bn hole.
- Further assisting the ZAR is SA’s buoyant interest rates that still hold a significant spread above buoyant US bond yields as well as the strong rise in SA’s terms of trade as commodity prices continue to perform well.
Baseline view:
The combination of factors now sees the ZAR in a strong position to perform well. So long as the SARB remains proportionately more conservative than other more developed economies, SA’s terms of trade hold up, the ZAR will enjoy ongoing resilience. Any improvement in SA’s political stability through a constructive budget agreed to by GNU partners and the USD-ZAR might still sustain a break below the 18.0000 handle.
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