Rand’s Reform Rally Wavers as Trump’s Election Fuels Dollar Strength

(Bloomberg) -- South Africa’s rand is caught in a tug-of-war between optimists who expect the country’s economic reforms to pay off in the longer term, and pessimists selling it off as Donald Trump’s policy proposals drive the dollar higher.

The pessimists are winning.

Since the US election on Nov. 5, the rand has slumped 5.2% against the greenback, reaching its weakest level in three months and leading a broad decline in emerging-market currencies.

That’s wiped out most of its year-to-date gain, fueled by signs the country’s coalition government in place since June will do what it takes to boost economic growth. It’s still one of only three emerging-market currencies to still show gains against the dollar this year, albeit at just 0.6%.

Confidence in the so-called Government of National Unity is evident in bond markets: benchmark local-currency yields are still lower than before the US elections. And a eurobond sale this week — the first in more than two years — attracted orders of almost three times the deal.

None of that is helping the rand. With Republicans in the US securing a trifecta of the White House, the House of Representatives and the Senate, investors see a strong chance Trump will implement his policy agenda, including import tariffs and large tax cuts.

That would likely fuel inflation, leading to higher interest rates and supporting the dollar.

“As long as Trump’s pro-growth agenda continues pushing real US yields higher, we’re likely to see dollar strength weigh on the rand,” said Henrik Gullberg, a macro strategist at Coex Partners.

The rand is also vulnerable from other angles. As one of the most liquid currencies in developing nations, it is often a proxy for deteriorating risk sentiment. Also, South Africa’s support for Russia and opposition to Israel may complicate relations between it and the US, harming the allure of local assets Citigroup Inc. strategists said.

Some stability may come from local investors who are bringing cash back in the hope that economic reforms will continue, said Mamokete Lijane, a global markets strategist at Standard Bank. The cost of hedging against rand declines over the next year in the local options markets has retreated since the US election, and is now at the lowest in more than three months.

“The rand’s underperformance against peers reflects investor positioning. Once positioning is more balanced, the rand could return to outperforming due to South Africa’s reform story,” said Gullberg. “But in a high-yield US environment, rand will still struggle.”