Market investors are trading cautiously before the outcome of US elections and a US rate cut, says Mike Keenan, the chief fixed income and currency strategist at Absa.
“We have to keep our thinking caps on because there could be watershed moments that push us in different directions from where we've been,“ he said in an interview.
Investors had been treading water for the past several quarters due to the restrictive global interest rate cycle, characterised by high interest rates “that became very restrictive”. The US was moving closer to a rate cut, which had critical implications for the dollar and commodities. But now US elections could impact the timing of a rate decision.
He said that if a Trump administration came into power, it would probably be more supportive of a rate cut than ever, “but we don't know for sure”.
However, if Trump, who was a Republican, won the election the jury was out about whether a Trump administration would be necessarily positive for the dollar or negative. There were good arguments on either side.
In the US elections, he said it was not only about which political party won as the Republicans and Democrats battled it out, but which party gained control over the Senate, for example.
“If the Republicans do come in, what kind of ascendancy will they have at the legislative level? In the past Trump would come out with some outlandish suggestions, but it ran out of steam when it came to signing certain things into law. If the Democrats lose by a lot, Trump would have a lot more things his way. So it's not only who wins, it's the margin of victory – that’s key.”
Keenan said that it was important to see where the market settled and what was the dominant school of thought because the dollar was such an important currency.
“If we can get some idea of where the dollar’s heading to post US elections, it’s going to give direction to emerging market currencies and other markets,“ he said.
However, looking at international markets, one had to also keep an eye on China to see if it would release more economic stimulus.
“They’ve been pretty sluggish and reluctant to do too much. But, maybe there will be a little bit more push on the stimulus side going forward. And then that will provide a boost for commodities,” Keenan said.
Rand
Keenan said that over the past year or so, South Africa’s rand had been a currency that emerging market investors had tended to short, versus long currencies like the Mexican peso.
But that was changing because South Africa’s recent election outcome was “pro business and Mexico has been the other way. So we are starting to see a lot more appetite for South Africa than what we've seen for a while”.
A big thorn in the side of the rand and South Africa had been electricity shortages and outages, but things were getting better. Keenan said that was “another reason that you can't really be short on the rand like investors were over the past year or so”.
He said he had seen a positive shift in investor sentiment towards South Africa post the elections, but the question now was: “How well is the GNU (Government of National Unity) actually going to gain traction in this whole structural reform?”
BRICS
When asked for his views around BRICS moving away from the dollar, Keenan said it was a perennial discussion that that kept coming up and it was gaining traction.
“If you look at central bank reserves’ general activity we are starting to see other currencies getting a little bit more of the action and filtering through into central bank reserves.
“I think we will see the dollar lose some of its dominance, but it's going to be still, for the foreseeable future, be the dominant currency. It’s going to take time and be a very gradual move. I'm not convinced that this is something that's going to happen very quickly.”
Clearly people were looking for alternatives, such as BRICS and cryptocurrencies, but it was tough to move away from the dollar as there was so much traded in dollars, Keenan said.
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