Trump Tweets the Edge
The ZAR was sold briefly on Thursday after Donald Trump had commissioned Mike Pompeo, the US Secretary of State, to "study" the problem of land grabbing from farmers in South Africa. Of course, with US foreign and economic policy melting into one this year, investors have been worried about whether Washington could consider the instrument of economic sanctions for change.
South Africa's ruling ANC party is currently reviewing how the constitution could be amended to expropriate farmland without compensation. A parliamentary committee will deliver an opinion on this topic by the end of August.
Where could this lead and how could the border react?
It seems unlikely that the Trump administration would tackle this issue with as much enthusiasm as it did against China (unfair trade and superpower), Russia (voting) or Turkey (with a US evangelical pastor). Nevertheless, the situation is certainly worth monitoring.
If Washington decides that action is needed, the world would, of course, consider South Africa's trade exposure to the US. 7% of South African exports go to the US and South Africa has a surplus of about $ 2 billion annually ̵
What would be the unlikely event that Washington suspends the sanctions threat to South Africa (in fact, South Africa was caught by US steel and aluminum tariffs early this year), how would the Rand react?
The rand is typically a high-beta currency that is threatening sentiment due to its relatively liquid equity and bond market and its outstanding position in emerging market benchmark indices. It is typically high-volatility currency and currently has a one-month realized volatility of 27% against the dollar. This is high compared to the Russian ruble (15%), the Polish zloty (11%) and the Mexican peso (14%).
Our mid-term fair value model (the BEER) currently has USD / ZAR around 8% above its fair value – but this can easily go into the 20-25% overvaluation zone or 16-17 in USD / ZAR rich. in times of extreme concern.