Trump induced volatility will continue

While the market has salvaged some calm after the election result the cyclical nature of volatility (and abrasive nature of Mr Trump) might suggests the storm is still to come

While Donald Trump winning the U.S. presidential election was unexpected, the initial reaction to the Trump win was not. The dollar was sold off against developed market currencies and safe haven attraction saw the likes of gold and the Japanese Yen amongst the most favoured investment destinations. Riskier assets such as emerging market currencies found substantial weakness. The Mexican Peso was hardest hit experiencing a more than double digit depreciation to take the currency to its worst ever levels on the news. These are trends worthy of remembrance when the next US catalysts ensues (or rather renews).

What was surprising though is that as markets digested the news, much of the aggressive initial market movements started to unwind. After spiking to nearly $1340/oz, gold now trades around $1300/oz, the Dollar/Japanese Yen halved its initial losses and emerging market currencies have clawed back a good portion of their respective losses. The Mexican peso however has remained significantly weak.

While the market has salvaged some calm after the election result (perhaps helped by a positive acceptance speech for once void of defamation), the cyclical nature of volatility (and abrasive nature of Mr Trump) might suggests the storm not to be over. Market will be interested to see just how the foreign policy rhetoric’s manifest, what the fate of the Federal Reserve chairperson Mrs Janet Yellen will be, the extent of fiscal loosening and government spending changes…. to name but a few of the expected catalysts for further market volatility. Trump has been particularly vocal about international trade and the aggressive renegotiations of agreements relating with the likes of Mexico, Canada and China.

From a local perspective, The U.S. is South Africa’s 2nd largest trade export partner (after China) and one would hope that the good trade relationship with America would be maintained. Emerging markets have shown a great propensity for weakness on the election with the rand part echoing the emerging market currency weakness led by the Mexican Peso.

A near 5% trading range for the rand on the Election Day reminds us of just how quickly the rand can depreciate when a risk off scenario ensues. The technical picture of the Dollar/ZAR shows the price to be reversing off its best levels of the year at R13.17/$. At current levels the Dollar/ZAR looks oversold and further ZAR weakness is expected, with the election day high at R13.83/$ the initial target. Beyond this level the rand could see R14.44/$. A move below R13.17/$ instead would suggest renewed ZAR strength and calm restored to emerging markets more specifically the SA market. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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