Analysts at ING note that the ZAR briefly sold off Thursday on news that Donald Trump had tasked Mike Pompeo, the US Secretary of State, to ‘closely study’ the issue of land expropriation from farmers in South Africa.
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“With US foreign and economic policy merging into one this year, investors have naturally started to worry about whether Washington could look at the economic sanctions tool to effect change.”
“It seems unlikely that the Trump administration would attack this issue with as much gusto as it has done against China (unfair trade and superpower threat), Russia (election meddling) or Turkey (holding a US evangelical pastor). Yet the situation is certainly worth monitoring.”
“Were Washington to decide that action needed to be taken, the world would naturally look at South Africa’s trade exposure to the US. Here 7% of South Africa’s exports go to the US and South Africa runs about a $2 billion annual goods surplus – largely in precious metals, stone and vehicles.”
“A particular focus may be South Africa’s eligibility for the African Growth and Opportunity Act, a Bill Clinton initiative providing duty-free status for US imports from eligible African countries.”
“Our medium-term fair value model (the BEER) currently shows USD/ZAR some 8% above its fair value – but that can easily extend into the 20-25% overvaluation area, or 16-17 in USD/ZAR, during times of extreme concern.”
“Were the US in late September to go ahead with 25% sanctions on the next $200 billion of Chinese imports, we could see the emerging market FX complex, especially the commodity exporters like South Africa, taking another leg lower.”
“So even though the rand looks to be cheap and has an implied yield of 7% per annum through the three month forwards, we’re more worried that USD/ZAR has to trade to the 15.50 area first.”
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