Rand Prospects for 2009

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By Cees Bruggemans

Very strange, but for some six months (counting from October 2008 to March 2009 inclusive), the Rand has averaged 9.95:$, month after month, like in flat earth.

There were sizeable daily variations, of course, at one point near 12:$ at the moment of maximum stress during 4Q2008, but on average a very flat kind of existence all round.

It was as if the world didn’t go walkabout, Eastern Europe didn’t go bankrupt, our equity market didn’t lose 40%, we didn’t have to fund an R200bn current account deficit and our politics didn’t feel otherworldly.

With that kind of tree hugging going on, what is a man supposed to forecast comes next?

Surely, as global shocks go, we can’t go bigger than what happened last September/October? And that was good for a step up from near 7:$ to near $10:$. That’s a 40% Rand weakening.

The betting is that the true big shock value lies behind us. Then also do allow for the IMF getting reinforced with capital, and fully expected to bail anything that needs bailing, in addition to all those Fed and ECB swap lines cluttering the world.

Also, the Rand has been undervalued at these levels. It isn’t as if the Rand is inappropriately valued, inviting corrective attention.

So downside for the Rand there might be, towards 12:$ and even $15:$, but it is not obvious what could deliver this shortly. This was before considering the outbreak of swine flu in Mexico last week and what it could potentially lead to globally, if not contained.

On the other hand, the Rand may not have much firming potential either if the SARB were to offer countervailing pressure by resuming its foreign reserve topping up, bearing in mind the state of the economy (down) and our exports (heavily down).

So far in April the Rand has moved back towards 9:$, but how much further could it go?

A positive shock could send the Rand sailing towards 8:$, never mind 7:$, for instance because New York equities are up and so are ours, or Chinese growth pulls commodity prices higher and us as well in its slipstream, or the Dollar sells off on Bad Hair Day and we get elevated, or all those good things together doing the pushing.

Yet the SARB might not like such Rand firming, and could start mopping (accumulating) some of the excess capital inflows doing the heavy lifting, storing such funds in the foreign reserves (and then presumably buying Re-elect Obama Bonds, ere long known as ROBs).

Then again could swine flu start pushing the Rand weaker if high yielders get penalized by a return flight to safe havens shortly?

Ultimately, we are not in control of the Rand, given global events and how they impact on Rand sentiment. We certainly seem to have limited defenses against a weakening Rand trend.

Yet internationally there also seems to be less proprietary action nowadays at big investment banks, with the Rand being just one beneficiary getting somewhat less attention?

Certainly, fundamental shock weakened the Rand by 40% in 4Q2008, but its stabilization thereafter came as a bit of a surprise, at a time when many people thought yet more weakening the natural thing to happen, given the severity of global events throughout.

At some point in recent weeks, however, the world seems to have come out of its deepfreeze. To some this is still a bear market rally. For others there is already more going on than just a bear turning over in its sleep. In other words, here comes the long awaited turn.

Only to encounter this weekend the logic of a swine flu outbreak in Mexico.

If the world is still going to get serially disappointed by non-progress in the US (and European) banking saga, or any other disappointment the world wishes to dish up (swine flu being only one potential candidate), we will find high yielders relapsing back towards their sold off levels. For the Rand this suggests 10:$, if within a wide 200 cent trading band. But potentially worse, depending on any averse new global shocks.

If, however, the world is steadily moving on, laying the foundation for sustainable recovery, by addressing the banking mess, getting fiscal stimulus going and rebooting IMF finances, with the global economy starting to respond (inventories, durable goods, production, capex) and successfully containing the swine flu outbreak, then the global investment picture will also keep morphing.

Between mid-2008 and Easter 2009, we saw the puncturing of the commodity boom and a great capital withdrawal getting underway as money started to flee the high-yielding-but-risky global periphery for the low-yielding-but-safe global centre.

Ironically, the safe financial centre then imploded after 15 September, shortly followed by a global real sector collapse, but this apparently added even more strongly to the centre’s safe haven appeal (don’t ask why, it just reminds too much of Fatal Attraction).

After five long months of debtors prison, March saw early stirrings, both on the US banking front (Timothy Geithner swinging his weight around) and in the economic data.

Baltic shipping index stabilizing after selling off rather severely, global car sales picking up (Germany, Brazil and China offering incentives, with the UK about to follow), industrial PMI signaling positive intent regarding inventories and new ordering in the US and Europe, and not forgetting commodity prices ending freefall and recovering. Also select data about exports (Japan, others) and business confidence (Germany).

Something is stirring, green shoots or whatever, but it is also informing equity and credit markets.

In the process, the great global capital withdrawal from the risky periphery seems to be reversing once again, some capital starting to leave safe havens and getting back into carry trade and peripheral high yielders.

In the process, the Rand also got lift, getting below 9:$ and the SARB allowing this. But from here onward, any further global favouring of high yielders and thus the Rand may see more SARB reaction via renewed foreign reserve accumulation.

Time will tell, not least regarding swine flu. Plan for a Rand in 8.50-9.50:$ territory for the time being, though allow for wide daily trading ranges of up to 100 cents either way.

Source: Cees Bruggemans, FNB, April 28, 2009.

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