Trump's Trade War Could Hit South African Rand Through Oil Price

(Bloomberg) -- The path ahead looks challenging for South Africa's rand, if oil prices are anything to go by.

Concern that U.S. President Donald Trump's measures will trigger a trade war may hamper global growth and weaken demand for oil, according to Mehul Daya, a strategist at Nedbank in Johannesburg.

“Oil leads the rand,” Daya said. “Sixty percent of the movement in the rand can be explained by changes in the oil price since 1990.”

Talk of tit-for-tat tariffs has already hit the rand and other South African assets. The currency led emerging-market losses Wednesday and was down 0.8 percent to 11.9065 per U.S. dollar as of 2:43 p.m. in Johannesburg. The yield on rand-denominated bonds due December 2026 jumped seven basis points to 8.09 percent. Johannesburg's equity benchmark tumbled 2.3 percent as escalating tensions between the U.S. and China dragged emerging markets lower.

“It's all due to those trade wars and a lot of uncertainty,” said Marius Grobler, a trader at Unum Capital. “Investors are seeing a lot of fear on the market.”

Since 2016, oil has recovered from about $28 to $68 a barrel. That's supported the rand, strengthening it to below 12 per dollar from more than 16, according to Nedbank.

“The current oil price implies a fair value for the rand of 11.70 against the U.S. dollar, which is very close to where we are currently trading,” Nedbank analysts Daya and Walter de Wet wrote in a note to clients.

Investor expectations for lower oil prices may weaken the South African currency by as much as 5.9 percent, they said.

“Notably using these forecasts implies that the fair value for dollar-rand will likely be in the range of 12.22 and 12.44 over the next two quarters.”

--With assistance from Thembisile Dzonzi

To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net.

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan, John Viljoen

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