Making cents of the rand

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By Shaun le Roux

On Saturday at Loftus there were too many Bulls and not enough Chiefs. When they are in the mood the Bulls are unstoppable and I would have backed Fourie du Preez to hold the Chiefs at bay on his own with the flag-waving Loftus faithful behind him. In rugby we are now world champions at virtually every form of the game.

But wait, it doesn’t end there. We are currently world champions on another front – the currency universe. Yes folks, the rand has been the best performing major currency against the US dollar this year – take a look at the ranking table below. The way the world looked at the end of 2008, it was easier to find punters to back the Bulls than the rand..

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There are a variety of reasons for the rand’s performance, including: rising commodity prices; a successful election; favourable interest rate differentials; and massive fiscal debt build in many developed nations. But, the single biggest factor has been the massive resurgence in global risk appetite. As always the rand is an excellent barometer of appetite for risk, and its move above 11 to the dollar in October of last year coincided with the epicenter of the global credit crisis. Then, the rand found itself amongst the worst performing currencies in the world. Its recovery since, to just under 8, takes it back to September 2008 pre-crisis levels.

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Where to from here? Right now, the rand, like commodities and stock markets, is overbought and a correction is likely. Thereafter, it comes down to whether the economic and financial crisis of last year has been put behind us. If the V-shaped recovery in the global economy that many are now talking about comes to bear, emerging markets will remain the investment destination of choice and the rand will remain strong and could even strengthen further. On the other hand, if the recovery peters out and risk aversion rises, one would expect money to flow back to the safe havens, including the dollar.

Predicting relative currency performance over the next few years is going to be difficult. We not only have to answer questions around the ability of the global economy to stage a recovery, but need to seriously consider the impact that the surge in government debt levels will ultimately have on the currency markets. The huge monetary stimuli and building fiscal deficits in countries like the US and the UK could ultimately be very inflationary. For heavily indebted nations inflation and currency weakness would be welcomed. At the same time many countries will favour a weaker currency given the current economic conditions in the hope of bolstering their export industries.

South Africa finds itself in quite a tricky predicament.  The rand is at the mercy of global financial markets and investment flows.  The current environment of rising global risk appetite, a weakening dollar and soaring commodity prices is rand supportive.  If the rand remains strong whilst global demand is weak, the impact on our manufacturing and export industries could be profound.  Factories and mines are busy being closed and jobs lost.  If this situation carried on unabated for a period of time, the long term implication for the economy and employment levels is worrisome.

Currency markets are going to be very interesting over the next few years. I am not sure which is more dangerous, taking on the Bulls at Loftus or trying to call currencies.

Source: Shaun le Roux, Alphen Asset Management, June 3, 2009.

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