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Trump vs Biden – what the US elections this week will mean for South Africa

The US presidential election on Tuesday (3 November) will dominate the news this week, with the outcome set to have a direct impact on South Africa’s economy.

Stellenbosch University’s Bureau for Economic Research (BER) said that polling continues to suggest that former vice-president Joe Biden is the favourite to win the presidential race.

There also seems to be a fair chance that the Democrats will end up controlling both houses of the US congress – the senate and the house of representatives, it said.

These outcomes may have a number of implications, but there seems to be at least two major ones, the BER said in a research note on Monday.

“Under the scenario of a so-called Democratic sweep in the elections, the likelihood of another large US fiscal stimulus package – say around $1.5 trillion – would be quite high. All else being equal, this would support the US and global economic recovery in 2021, with positive spill-overs to South Africa,” it said.

Another important factor is that a Biden Presidency may be beneficial to one of South Africa’s major export markets, such as China, the BER said.

“Current thinking is that while not engaging China with kid gloves, Biden will employ a less combative stance vis-à-vis China – especially on trade matters.

“To be more specific, he is unlikely to use tariffs as a means to force concessions from China. This should be beneficial to the Chinese economy, with potentially some positive effects on the country’s demand for raw materials, many of which are supplied by South Africa.”

Given the high stakes, global financial markets may be on edge and volatile until there is greater clarity on the ultimate US election victor, but also the accompanying policy agenda, the BER said.

Bullish

The rand weakened in early trade on Monday as caution crept in ahead of the election, while a surge in global coronavirus cases continued to weigh on sentiment.

“The markets continue to trade cautiously as they await the outcome of the US elections this week and amid the ongoing and escalating effects of the increase in the number of Covid-19 infections,” said Nedbank in a research note.

However, a number of major banks are bullish on the rand heading towards the end of the year.

Analysts at Morgan Stanley, quoted by Reuters, said that investors should position for a year-end rally in emerging market currencies including the rand.

In a research note to clients, Morgan Stanley analyst James Lord cited less time for surprises ahead of the US presidential election and supportive seasonal factors as support factors for an emerging market rally.

“The market appears to be under-pricing the possibility of a blue sweep,” Lord said. 

“With limited time left and many votes already cast, we think the opportunity for the polls or events to meaningfully shift the narrative is limited.

“We stress that, while the outcome of the election of course remains uncertain, for those who wish to position for a Democratic win, risk/reward for EM looks compelling especially in the case of a united government, which could result in sizeable stimulus and a more consistent set of economic policies.”

Morgan Stanley said that it liked Brazil’s real, Mexico’s peso and Colombia’s peso, and had entered long positions in South Africa’s rand and Russia’s rouble.

In credit, the bank said that it has also boosted exposure to South Africa, Brazil, Egypt, Ghana, Ukraine and Mexico’s Pemex.

This follows similar comments by the Goldman Sachs Group which said it believes that the dollar may tumble to its lows of 2018 on the rising likelihood of Joe Biden winning the US election and progress on a coronavirus vaccine.

“The risks are skewed toward dollar weakness, and we see relatively low odds of the most dollar-positive outcome – a win by Mr. Trump combined with a meaningful vaccine delay,” Goldman Sachs said in an October note.

“A ‘blue wave’ US election and favourable news on the vaccine timeline could return the trade-weighted dollar and DXY index to their 2018 lows.”

It recommended investors short the dollar against a volatility-weighted basket consisting of the Mexican peso, South African rand and Indian rupee. The strategist group also suggested buying the euro, Canadian and Australian dollars against the greenback.

“The wide margin in current polls reduces the risk of a delayed election result, and the prospect for near-term vaccine breakthroughs may provide a backstop for risky assets,” it said.

R16/dollar? 

The US elections this week is also likely to have a ripple effect on trade, which has seen a strong recovery, said Dr Greg Cline, head of corporate accounts at Investec for Business.

This, despite the trade war which has led to diversion of trade flows away from both China and the US and the lockdown ensued by Covid-19. Cline added that the country’s foreign exchange risk appears to be contained at this time.

The Investec-expected case for USD exchange rate forecast is R16.50 to the dollar for this quarter with a breakthrough of the R16 level by the end of the year, he said.

“Considering that South Africa is a trillion rand import economy, this may provide a level of comfort to those expecting the rand to weaken considerably further. While export pricing has thus been attractive this year, the expectation is for the imports market to recover in line with the rand.”

However, Cline said that market volatility has historically increased ahead of elections given knee-jerk reactions to election outcomes.

“We are always going to be passengers to market movements and forex fluctuations on the back of international relations and the strength of the rand is a big determinant.

“While some may argue that South Africa is in a debt spiral, with the bond yield curve suggesting the potential for sovereign default at some point in the future, there is significant Foreign Direct Investment (FDI) potential that will be realised through political certainty and strong fiscal policy locally and globally.”

The rand was trading at the following levels against the major currencies on Monday (2 November):

  • Dollar/Rand: R16.30 (+0.3%)
  • Pound/Rand: R21.02 (-0.09%)
  • Euro/Rand: R18.96  (+0.24%)

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