30 June 2009
Johannesburg — THE rand surged to a near 10-month peak at R7,87/ yesterday, in a move which may prove to be a double-edged sword for SA's faltering economy.
The unit's gains of about 20% against the dollar and the euro in the year to date is bad news for the embattled manufacturing sector, as it makes exports less competitive.
But its appreciation will also help ease inflation pressures, which means interest rates may fall again or at least remain lower for longer, helping to revive growth in the economy later this year.
Views on where the rand will be at the end of this year are as divided as opinions on whether its gains are good or bad for the economy.
Standard Chartered sees the rand strengthening to a robust R7,60/ during the final quarter of this year, based on expectations that emerging market assets will be firmly back in vogue by then.
Nomura sees the volatile unit weakening to R10,25/ by the end of this year, after a sell off driven by SA's large deficit on the current account, its broadest measure of trade in goods and services.
In both cases, the arguments make sense. But it is important to remember that the behaviour of the rand, which is a proxy for emerging market risk, has all too often defied logic in the past.
In the past few days the unit has breached the R7,86 level which prompted Reserve Bank governor Tito Mboweni to personally intervene a month ago, calling news wires to say that some would perceive the currency's latest gains as "unwelcome".
But the Bank's unexpected decision to keep its repo rate steady at 7,5% last week is one of the main reasons why the unit has outperformed its emerging market peers in the past two days.
That decision revived appetite for the rand's "carry trade" appeal, and also spooked local exporters, who had been waiting to sell their foreign exchange earnings in the hope that the currency would
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weaken. Revived global risk appetite -- which has spurred foreign buying of local shares -- also played a role in the rand's spurt through the psychologically key R8/ level since then.
Whatever the reason, traders are reluctant to predict what the unit will do right now. The only thing which can be said with any certainty is that if it closes below R7,80/ for two days in a row, it is likely to approach R7,76, the next near-term target. If that breaks, R7,50/ will be in its sights.
"It looks constructive for the rand, provided global markets remain robust," said Citigroup senior dealer Julian Wilson. But he is somewhat distrustful of the trend.
So is Peter Attard Montalto, emerging market analyst at Nomura in London. "The rand is overvalued by about a third. We see it at R10,25 at the year-end, and fair value at R12/ in the longer term," he said.
That is based on Nomura's opinion that SA can only sustain a current account deficit of 3,5% of gross domestic product (GDP), versus 7% in the first quarter of this year.
It also takes into account the likely negative effect of the country's growing budget deficit, which Finance Minister Pravin Gordhan says is set to exceed its original estimate of 3,8% of GDP this year.
For the rand bears, a weak currency is not a bad thing -- it will boost demand for local exports when the global economy picks up momentum later this year.
"A rand sell off is key for the economy to recover ... and when the rand goes it will go quite quickly," Attard Montalto says.
Razia Khan, regional research head for Africa at Standard Chartered, does not think a weak currency will be a panacea for SA's economy. Local exports were not weak because of the rand, but because of weak global demand, she said.
"In that context a strong currency doesn't help, but it will help bring about lower inflation. That should help keep interest rates low for longer and generate more of a rebound in the economy than a weak rand could," she said.
The Bank said stubbornly high inflation, was behind its decision to keep rates on hold last week. Markets had expected a cut of half a percentage point, after an easing of 4,5 percentage points since December.
Brait economist Colen Garrow says based on his model of purchasing power parity, the rand could theoretically rally to R6,95/S Realistically, a rally to R7,40/ was possible. But he sees that as bad news.
"We need a weak rand as a prop. Manufacturing used to contribute 22% of GDP and now it's just 15%," he said.
Citigroup economist Jean-Francois Mercier sees the rand sliding to R8,40/ over the next three months, and to R9/ in the next 12 months.
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