Jameel Ahmad | FXTM
As the financial markets conclude the first month of trading for 2018, the South African Rand has not only managed to hang on to its gains from the aftermath of the December 2017 ANC Conference, but generated further strength. This time, the encouraging momentum for the Rand has not been inspired by domestic headlines, but by continued weakness in the US Dollar.
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Despite suffering its worst year in 2017 since 2003 with losses above 9%, 2018 has seen the US currency follow a similar trend. The Dollar Index has already declined a further 3.2% year-to-date (YTD), with the Greenback weakening to its lowest level since December 2014 in the early hours of January 25. In response to the Dollar weakness, the Rand has climbed 3.85% and is seen as the fifth best performing major as of writing.
All current indications suggest that the Dollar is at threat of resuming its downfall as time progresses, representing an opportunity for the South African Rand to continue its resurgence.
Reasons for the USD fire selling are widespread; one of the most interesting aspects is increasing confidence that the global economy is catching up with the United States. Optimism over global growth has not been this high since before the global financial crisis, and there are expectations that the likes of the European Central Bank (ECB) and Bank of Japan (BoJ) could be about to follow in the footsteps of the Federal Reserve by beginning the process to normalize monetary policy. Although policy normalization in the developed world was previously thought to be a risk for the emerging markets it is actually working in the favour of emerging market currencies so far – weakening the ‘pull’ factor for the Dollar when other developed currencies like the Euro or Japanese Yen potentially offer yield that has not yet been priced into the market.
Another factor that appears to be supporting the prolonged bearish sentiment in the US Dollar is the fear of President Trump stepping up his protectionist narrative. The pledge to put “America first, and always” is seen as an unknown risk for a global economy that has not looked as positive since the global financial crisis, and could now threaten investor confidence in the US Dollar even further.
The weakening Dollar will play into the hands of the US President, who has in the past been explicit in his comments that the USD is “too strong”. It also represents an opportunity for many different currencies around the globe to strengthen to levels not seen since the days of the Federal Reserve signaling to the financial markets that it was preparing to eventually raise US interest rates, something that stretches all the way back to the USD strength that began late 2014.
