How Trump is affecting emerging markets

https://www.moneyweb.co.za/wp-content/uploads/2018/06/180627-03.mp3

NOMPU SIZIBA:  The oil price is up nearly 2% today on US President Donald Trump insisting that US allies stop importing crude from Iran. This caused a major concern in Asian markets with a general slide there. Well, to examine what this all means I’m joined on the line by Jameel Ahmad, the global head of currency strategy and market research at FXTM. Thanks very much for joining us, Jameel. Why this reaction on the oil price today?

JAMEEL AHMAD:  Thank you very much for having me. It’s certainly been a very volatile day for the oil markets. The price of oil is now re-challenging. It’s at 2018 highs, and it seems like it’s about to meet them possibly over the next hour or so. We’re only one, just less than a dollar away from the 2018 high, which would mean that this is the strongest level in the oil markets since the famous crash in the price of oil all the way back in the end of 2014. Now what’s driving the sentiment is there is speculation on reports that US President Trump has ordered other oil importers to not take oil from Iran, or face the risk of sanctions. This seems to have really weighed on sentiment today and the price of oil has surged as a result. It’s quite spectacular when you consider that just a week ago oil prices were looking very weak. They were merely $60 as a result of concerns over Opec. Now only one week later the price of oil has rallied more than $10 [a barrel].

NOMPU SIZIBA:  So now what impact did you see on affected currencies, or currencies in general?

JAMEEL AHMAD:  Actually this has been quite an isolated move where we haven’t really seen that much of an impact on the currency market. Why this might be is likely because of the trade war concerns, an ongoing theme in the financial markets. They resulted in a lot of risk aversion in the financial markets as investors are not so attracted towards taking on risk, which means that they are less attractive to investors in emerging market currencies like the South African rand, and this is potentially what has delayed the oil market rebound towards…related into a rally for our commodity-linked currencies, such as the Canadian dollar, the Australian dollar and other currencies that have economies that are reliant on commodity exports. So perhaps there’ll be a delayed reaction if these trade war concerns between China and the United States do weaken as we’ve seen over the past couple of hours.

NOMPU SIZIBA:  I want to digress a little bit and focus on the South African rand. You did touch on the drivers of the emerging market currencies. We did see the rand drop by over 2% today. Is that all a product of what’s been happening globally, or are there any local factors that you think are also weighing on the currency?

JAMEEL AHMAD:  It’s mostly external factors. The global factors, which were a big concern for the markets right now, such as the trade war headlines and also the ongoing resurgence we have seen in buying demand towards the US dollar, and some local concerns over economic growth probably lagging behind as potential is not helping the South African rand. But we are seeing emerging market currencies as a whole across the globe are completed whacked by the resurgence in the US dollar over the second quarter. This has been a primary catalyst behind the South African rand weakening around 13% this quarter, which has basically reversed all of its previous momentum from Q1.

And actually there are only two emerging market currencies across the globe to date that have strengthened against the US dollar in 2018. These are the Columbian peso and the Malaysian ringgit. All other emerging market currencies in recent weeks have been really punished by the stronger dollar, trade war concerns, risk aversion and a general lack of risk appetite from investors.

NOMPU SIZIBA:  Alright. So now back to the Iran story. Where does this leave the signatories of the Iran deal that the US pulled out of? Are they going to have to do as Mr Trump tells them? What does this mean politically and economically – not just for them but for everybody else?

JAMEEL AHMAD:  It’s a very interesting question. If you look back to where back to where President Trump pulled out of that historic Iranian nuclear deal of 2015 just a few weeks ago, other signatories would then be, say, in agreement – including the European Union, which was Germany and the United Kingdom, and then we had also Russia and China in the agreement as well – they all indicated in the hours following the Trump decision that they would stay within the agreement and that they had no intentions of pulling out and imposing their own sanctions on Iran.

If you look a bit closer, the reaction we’ve seen in the markets today, and specifically in the price of oil, these comments from Trump that he would impose sanctions himself on anyone who imports from Iran suggest that maybe something a bit different will happen. This is a news development that is developing as we speak and it’s definitely a new thing in the financial markets today, so we’ve got to watch out to see what happens over the upcoming future to really provide an outlook as to what could happen next.

NOMPU SIZIBA:  Okay, well expect a call from us in a couple of weeks. Thanks very much, Jameel for your time and your insights on this issue.