Quo Vadis Rand?

Quo Vadis Rand?

Where are you going Rand? Since Jan 2011 the Rand has seen a dramatic fall. Not 105% as indicated in the graph below. The correct way to calculate the decline is by using the inverse of the Rand/$ quote, namely US cents/Rand. The Rand fell from about R6.50 (15.38 US cents per Rand) to R14 (7.14 US cents per Rand). That equates to a decline of 53.5% in just over 4 years.

In the first graph the Rand is plotted with a regression line on a Semi-Log scale. The Rand did break out far above the regression line a few times, especially from May 2013 to February 2014. The Rand tends to revert back to the line after such breakouts. In 2012 and 2014 quite decent recoveries in the Rand $ exchange rate followed.

Rand Sept regression

The second graph plots the actual Rand/$ exchange rate and the “Fair Value” of the Rand based on PPP (Purchasing Power Parity) from 1990. PPP is calculated by devaluing the Rand with the difference in inflation between South Africa and the US. The graph also shows 1 and 2 standard deviations. Only one other time did the Rand overshoot the 2nd standard deviation and that was in 2001. That was an exceptional time and at the time confused every economist as there were very few discernible reasons for the fall. All sorts of reasons were investigated like foreign Banks being blamed that they colluded to drive the currency weaker etc.

Rand Sept

The main culprit for the massive fall was however a small directive by the SARB to enforce a regulation that required a genuine transaction to be the basis for any currency transaction, exports or imports for example. That took speculators out of the market, but speculators provide much needed liquidity. With less liquidity in the currency market the Rand started to weaken and exporters started to hold back on repatriating the dollars earned. Conversely importers started to take forward cover for imports many months in the future, exacerbating the immediate demand for dollars in an illiquid market. If a client takes out forward cover, the Bank actually buys the dollars immediately and charges the client the difference in interest rates here versus the US, plus a profit of course. It means that if there is a scramble for forward cover, demand for Dollars is compounded.

Once the SARB reversed the directive the Rand soon strengthened to levels seen in 1999. In my opinion that overshooting can be disregarded as a fake blip, not caused by real economic or political reasons. From 2003 to 2007 we actually suffered from an overvalued currency. Sounds impossible today, but I remember Bell Equipment (heavy machinery) having to lose the market share they built in Australia over many years because they could not export at a loss anymore. It had a dampening effect on economic growth because exports suffered and imports became too cheap.

Conclusion

Calling a bottom to the Rand is like trying to catch falling knives, you have a good chance to get hurt. While nobody can forecast when the Rand will hit bottom, in my opinion the fall has been grossly overdone and I will venture to say that we have a better chance to see R13.50 than R14.50 next. We should also have a year or more of sideways to stronger currency levels. As was the case with our previous big declines, at some stage the weak Rand starts to work, making exports more competitive and tourism very attractive as well as investment. All we don’t need is another strike in an export industry, read gold and coal, as well as a Government that makes investment and tourism difficult. May sanity prevail in the ego fight Gigaba has with Hanekom.

– Gerhard Lampen.

Head Sanlam iTrade Online

No Comments

Post A Comment