Trade War Escalation Hurts Rand, Dashes Rate-Cut Hopes

(Bloomberg) --

The escalating trade war has added to the South Africa’s gloomy macro environment, further weighing on the rand and probably scuppering any chance of policy easing in the near term.

Money markets now pricing in a reduction of just 10bps over the next 12 months, versus 60bps less than three weeks ago.

The rand has been the hardest-hit among emerging-market currencies, with a slump of 4.8% in the past five trading days. Next-worst is the Colombian peso at 2.9%. As a result, inflation expectations are ticking higher, with the five-year break-even rate climbing 34bps in the past two weeks.

That gives the central bank very little room to maneuver following the 25bps cut last month. It also leaves the rand and South African bonds vulnerable as the economy struggles to gain traction and government borrowing mounts.

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