NOMPU SIZIBA: Jameel Ahmad is global head of currency strategy and market research at FXTM in the US. Jameel, thank you for joining us. What do you see as the significance of this meeting between the US and North Korea, and of course this signing of a framework that seeks to work towards the process of denuclearisation?
JAMEEL AHMAD: Well, I don’t think we can downplay the significance of the meeting. This was quite unprecedented. Oh, it’s very significant. This is the first-ever sitting US president who has met a North Korean leader, and let’s not also forget the recent history between President Trump and the North Korean leader has not always been picture-perfect. There have been tensions and there has been a lot of uncertainty in the financial markets over whether these two could potentially get involved in any conflicts. However, it seems that the meeting went very well. The markets appear to be positive about the meeting, and there seems to be a quota of positive reaction in the financial markets following the summit, although it might have been reached somewhere as the day progressed. Everybody is positive over the process or the possibility that North Korea will enter a period of denuclearisation, which actually will remove very significant and persistent risks to the financial market sentiment, in that North Korea has some very capable nuclear capabilities, and they have a lot of potential there. So removing this uncertainty and removing those capabilities will be something that investors welcome.
NOMPU SIZIBA: But do you think it was an equal meeting? It seems as though Donald Trump was saying a lot more than his counterpart. Do you think that Mr Trump was basically dominating the conversation?
JAMEEL AHMAD: It is a question. My honest view is that both leaders had a lot to bring to the meeting, and it comes down to legacy. For the North Korean leader – although he was into giving up his nuclear weapons, it seems, which is something that North Korea has had as its ace – he had inherited a country that has lived in isolation for a number of decades. And now the North Korean leader – if the sanctions gradually get relaxed and North Korea goes into a period of denuclearisation – would potentially be remembered as the leader of North Korea who dragged his country out of this period of isolation, whereas for President Trump, on the other side of the table, he could be the one sitting US president who managed to meet the North Korean leader and managed to do something that many others had not thought possible to do, which is persuade and encourage North Korea to give up its nuclear weapons.
NOMPU SIZIBA: This morning I keenly woke up wanting to see what was happening, and of course I saw the statement coming out from Mr Trump that it was a very, very successful meeting. He likes to say more, more, more, very, very, very. Despite that, I looked at the Asian markets and yes, they were positive, but they weren’t exactly shooting the lights out. Why was that?
JAMEEL AHMAD: I don’t think you were the only one here who had woken up and was wondering what exactly was going to happen, or what was taking place. Look, everything looks positive, and there was a positive reaction in the market. However, it seems to have become more subdued and a bit more muted at the day progressed. What it could be is that the markets were expecting a positive outcome. When you take President Trump’s comments over recent days – that he was on a mission of peace and there was a real chance of success – it appears that investors did price some premium into the markets that this would be a positive meeting. And it became a bit more muted as things progressed because there is still some uncertainty over what exactly the declaration is that’s been signed, and how long it might take for the process of complete denuclearisation for North Korea.
NOMPU SIZIBA: Now, with the first meeting seemingly positive and the basis for more to come, how is it envisaged that the North Korean economy can be liberalised in time, going through the process of complete denuclearisation, which could take many years? Surely the North Koreans can’t wait for 15 years before they get cut some break in terms of economic sanctions?
JAMEEL AHMAD: It’s another good point, whether it actually stays. We need to remember that North Korea has by all accounts lived in isolation and some living conditions there have been stiff for a number of decades and years. So any improvement in this one is a positive for North Korea. North Korea is highly dependent on its one and only major ally – which is China. So if North Korea is able to open up its markets more internationally or beyond become more able to build relations with other nations and other major economies, this can only benefit North Korea on a gradual basis. North Korea is going to stand to gain from this a lot and I think that the leader of North Korea Kim Jong Un has really had an opportunity today to define his own legacy and to provide the basis for a much more prosperous North Korea than it was yesterday, what some might have imagined would not be possible – and it’s not just North Korea but includes South Korea as well.
And if you look at South Korea, it’s got a frozen economy with so much potential, but it has been [hidebound] from this uncertainty over what is happening or what could potentially happen between North and South. In recent weeks North and South Korea have met and taken steps that some thought would not be possible. So this goes to show how so many different nations and economies and markets can gain from something like this.
NOMPU SIZIBA: Now you’ve highlighted South Korea of course. It’s an obvious geographical kind of neighbour, but what other countries would immediately benefit from this first positive summit? Was any of this borne out in the currencies?
JAMEEL AHMAD: I would say they would be the United States, because President Trump – this is going to be a big win for him. And then there is North Korea for the reasons that we’ve pointed out, and the same with South Korea. The regions that North Korea is surrounded by in the south-east Asian region, this is of benefit to them as well. I think Singapore said earlier today that they’ve hosted the summit and they’ve invested in the summit because they would like to be remembered as the location where it became a significant landmark for what could potentially become world peace. So that goes to show how much our country has to gain from this, not just from an economic standpoint and not from a macroeconomic standpoint either, but just from the legacy that’s at play.
In currency markets we say the regions will be more positive, so the Malaysian ringgit, Indonesian rupiah, Chinese yuan could possibly gain because there is a [possible] significant reduction of risk. And if investors do become a lot more attracted towards investment in global stock markets, this could have an even more implications on this appetite, encouraging investors towards risk. That’s why even your higher yielding currencies that have been very isolated and geographically away from North Korea can benefit, such as the South African rand, which is highly reliant on investor appetite towards taking on risk.
NOMPU SIZIBA: We’ll come to the South African rand in just a moment. The dollar itself has firmed quite a bit, as you’ve mentioned. But I wanted to ask is that a product of US economic fundamentals and just a feeling that more interest rates are coming? We are going to hear from the US Fed I think tomorrow – or has the positive summit also played a role in the lead up thereto?
JAMEEL AHMAD: It’s an interesting point and a good question. I could say that it’s a mixture of both. For example, from the summit perspective President Trump’s a major winner from here because he has removed some of this ongoing political risk that investors are very sensitive about. But let’s not forget – the US economic fundamentals are still significantly strong. They are actually very impressive when it comes to economies. The United States market and the US economy itself remains far, far beyond its developed peers such as Europe and the United Kingdom, as just two examples. We also have a US interest-rate decision tomorrow where the markets largely expect another US interest-rate rise, which is once again another reminder to investors that the Federal Reserve and the US economy remains so far beyond its developed peers that that gap is just continuing to stretch. And this is positive for the US dollar as well.
NOMPU SIZIBA: Look, all praise to Mr Trump for trying to broker peace and all of that, but before his historic meeting today he obviously disgruntled many of his allies. At the G7 he refused to sign the joint communiqué, and he adopted this continued posture of protectionism, America first. And it’s interesting, some are saying that Donald Trump is going out of his way to unsettle his allies on the one hand [Jameel chuckling], and then he is going out of his way on the other hand to make friends with people who are known to be dictators, who make their citizens’ lives uncomfortable and all of that. Surely what happened at the G7 was a very negative thing for the US and its so-called allies’ relations?
JAMEEL AHMAD: Certainly it’s interesting and something we, say, expect from a very unpredictable US administration and a very unpredictable US president. If somebody would have said a matter of weeks ago that Trump and the North Korean leader would actually meet, there would have been scepticism. If somebody would have said that six, seven months ago, you’d have thought that was crazy. But it’s happened. We see this from President Trump a lot – he’s very aggressive and outspoken in rhetoric, which can raise eyebrows and it can cause media headlines and it can also cause uncertainty, volatility in the markets. However, on a personal level when it comes to on the ground, he appears a lot more toned down, President Trump at the North Korean meeting today. Both parties were just a few months ago threatening to potentially blow each other apart – I think Mr Trump called the North Korean Rocket Man at a summit not that long ago.
When it comes to the G7, it’s something that needs to be listened to, and we cannot ignore the risk over a potential trade war, because these are very unpredictable tactics from President Trump. However, he has this mid-term election in a couple of months’ time and maybe what he has done is transfer peace to his residents, putting the market first and always, and this protectionist nature that he campaigned very hard for will rally his supporters. And you can’t doubt that.
NOMPU SIZIBA: I hear you. When all is said and done, where does the current world order and the strength of the US dollar leave emerging market currencies like the South African rand?
JAMEEL AHMAD: It’s not positive because the US dollar appears very strong at this point, and the outlook is that it’s likely to get stronger – for a couple of different reasons. This resurgence in the dollar that we’ve seen since April really took investors by surprise. It’s caused a lot of damage on the currency markets where the strengthening dollar, which is around 6%, I think, over the second quarter of 2018, has very large implications across the globe. I think there are only now four or five emerging market currencies that have gained against the US dollar this year, while most of the majors are now lower against the dollar. If you had said that before April, it was the other way around, where more things were higher against the US dollar.
The outlook is that the dollar will continue to strengthen. The US economy is very strong, the United States Federal Reserve is very upbeat and optimistic on the economy, and what is also helping the US dollar this time is these indications that the very significant economic momentum that we were seeing in economies like Europe last year seems to have peaked somewhat, and it’s opening the door to further interest rate-differentials in the US dollar. It has also opened the door for more discussions over how far behind the US economy is, compared to its peers – when it comes to recovering from that grave global financial crisis – which is all very dollar-positive.
Unfortunately it’s very negative for emerging market economies, which is why the South African rand has remained under pressure for some time. It’s not the only currency that’s remained under pressure because, like I said, there are only four currencies in the global emerging marketplace that have gained against the US dollar. But the outlook is that the dollar will presumably get stronger, which means that we can expect further pressure on the emerging market currencies as well.
NOMPU SIZIBA: So briefly, for the South African economy we can expect more and more inflation to come?
JAMEEL AHMAD: I believe so. This is a case of the negative momentum on the South African rand over the second quarter of the year. At some point this will weigh into price pressures and would raise inflation projections. It might have some benefits when it comes to exports and external investment, where investment inflation is going to increase.
It’s not only South Africa that’s looking at this prospect. Over the past couple of weeks India, Indonesia and Turkey have all needed to raise interest rates, largely because of their currencies being in crisis and what we’ve seen from the dollar strength. It is a dollar story that is causing a lot of turmoil in the emerging markets.