Dollar strength undermines commodity currencies - Annabel Bishop
Annabel Bishop, the chief economist at Investec, in a Commodities' Currencies Note said:
The rand, and other commodity currencies, have seen investor sentiment sway this year, as the US dollar has gained substantially against other currencies in general since October in the run-up to, and then over, the Trump administration to date.
The US dollar has reached its strongest point over the last few months, excluding the financial crisis of 2001/2002 and the period over most of the 1980s. The 1980s saw one of the most severe economic recessions in the world in recent times.
In addition, 2022’s period of elevated market risk aversion stemming from the Covid-19 lockdowns, high inflationary environment, and the impact of the Russian/Ukraine war would need to be excluded in this US dollar scrutiny.
All these three periods have tended to see financial market risk-off (risk aversion), which saw safe haven flows into the US, particularly into US Treasuries (US bonds), as investors worried about the impacts on growth and equities performance.
However, financial markets are not risk-off now and have not generally been over the past several months. US equities saw substantial support (including foreign flows), and the US economy is expected to see robust growth this year and next.
There have been concerns over the impact of tariffs, but the Trump administration has proved judicious with these so far, mainly wielding protectionism (and other penalties) as a threat to force countries to fall in line with its foreign policies.
That is, the US has imposed harsh tariffs on some countries, then in the main rolled these back (paused institution) on acquiescence to the US’s demands, mainly on stemming illegal immigrants and drug flows.
The US’s recent tariffs on steel and aluminium have also been focused, as opposed to feared universal tariffs. This time, not at specific countries, but at specific goods (steel and aluminium and articles thereof).
Commodities prices are directly affected by movements in the dollar, as international commodities are US dollar denominated. Commodity prices also impact commodity currencies, which has also added to weakness against the US dollar.
Bonds
Foreign investors have sold-off South African (SA) bonds this year to date on a net basis, at -R2.0 billion worth of SA bonds, having previously been net purchasers to early February, of R12.9bn worth (Bloomberg JSE settled data), negatively affecting the rand.
The switch came in the first week of February as executive orders from the White House saw the US ‘imposing sanctions on the ICC (International Criminal Court)’, and ‘addressing the egregious actions of the Republic of South Africa (among many other executive orders).”
What the White House said:
Specifically, “(t)he United States unequivocally opposes and expects our allies to oppose any ICC actions against the United States, Israel, or any other ally of the United States that has not consented to ICC jurisdiction.”
“The United States will impose tangible and significant consequences on those responsible for the ICC’s transgressions, some of which may include the blocking of property and assets, as well as the suspension of entry into the United States.”
A separate executive order notes: “(t)he United States cannot support the government of South Africa’s … ‘undermining United States foreign policy, which poses national security threats to our Nation, our allies, our African partners, and our interests.”
“South Africa has taken aggressive positions towards the United States and its allies, including accusing Israel, not Hamas, of genocide in the International Court of Justice, and reinvigorating its relations with Iran to develop commercial, military, and nuclear arrangements.”
“It is the policy of the United States that, as long as South Africa continues these unjust and immoral practices that harm our Nation” … “shall, to the maximum extent allowed by law, halt foreign aid or assistance delivered or provided to South Africa, and shall promptly exercise all available authorities and discretion to halt such aid or assistance.”
Impact
South Africa is a commodity exporter, with metals and minerals making up the bulk of exports. Consequently, movements in global commodity prices, and the US dollar, do have an impact on the rand and so inflation, interest rates, and growth.
Commodity prices are likely to be moderate this year, consequently not providing much support to commodity currencies. The US dollar is the reserve currency of the world, gaining further support in uncertain times, along with the gold price.
Annabel Bishop is the chief economist at Investec
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