Rand under pressure as Harris vs Trump heats up

The rand has weakened due to a rise in global risk aversion ahead of the US elections, as markets are uncertain about the outcome and its potential impact.

This is according to Investec chief economist Annabel Bishop, who said the rand has averaged R17.53/USD so far this quarter.

She explained that the currency is on the back foot in the run-up to the US election, which has led to increased global risk aversion.

Specifically, commodities currencies like the rand have weakened as global manufacturing production slumped in the world’s largest economies.

The rand’s strongest level so far this year was R17.03/USD, which it reached at the end of September by benefitting from the larger-than-expected US interest rate cut. 

However, the rand has since weakened against the dollar due to global risk aversion. 

In particular, the rand recently lost ground on gains made by former US President Donald Trump in some recent surveys on the upcoming US election. 

This is due to concerns of increased protectionism, as tariffs and sanctions are expected to rise if he is re-elected.

Bishop explained that the close nature of the run-up to the US election, with differing polls often showing either Trump or Presidential Candidate Kamala Harris in a very close lead, has also increased market uncertainty, adding to the risk aversion. 

The US economy is expected to see better economic growth under a Trump Presidency, as taxes are cut for corporations and individuals, funded by higher tariff revenues, increased energy production and cuts in wasteful expenditure.

“Trump’s tax cuts would run the economy hot, pushing 2028 GDP up 0.3% relative to the pre-election baseline and adding 0.4% to prices. Harris’s more cautious approach sees growth -0.1% lower and inflation up 0.1%,” according to Bloomberg.

Bishop said that, with just over a couple of weeks until the US election, market caution has increased notably over October as the polls remain so close, fuelling risk-off sentiment in financial markets.

This has, in turn, eroded the gains the rand made after September’s US rate cut.

On immigration, Bloomberg has said it is unclear to what extent each candidate will succeed in implementing their immigration policies. However, the primary economic impact of any policy that reduces the population will be a lower GDP.

Implementing immigration policies would generally result in an accompanying reduction in demand. This is likely to lower aggregate price pressures in the short term, with variable impacts at the sector level ranging from -0.2% to -1.6%.

On tax policies, Bishop said a Trump presidency is expected to add substantially more to the budget deficit.

“Harris’ policies would do nothing to reduce it … Trump’s proposals for extending income-tax cuts and lowering corporate tax lifts debt to 116% of GDP in 2028,” according to Bloomberg.

This follows from Bloomberg’s view that, in 2024, the US is expected to run a fiscal deficit of around 6.5%, and its debt-to-GDP ratio will approach 100%, up from 79% in 2019. 

Bishop explained that a larger US budget deficit raises the risk of a fiscal cliff and bolsters risk-off.

However, when it comes to the rand, the currency is expected to be weaker under a Trump presidency. 

Bishop said South Africa has come under fire before from US tariffs when Trump was in the White House, while global economic growth and risk aversion were negatively impacted.

“The former president has touted baseline 20% tariffs on all imports, and as much as 60% if they come from China,” Bloomberg said. 

Bishop said the current expected case is a Harris win.