The rand effect ÔÇô bad news for Nam
The South African rand has been one of the biggest losers in recent weeks after going down nearly 8% in recent months.
Since the beginning of this year, the rand has shed about 13%.
A few fundamental factors are weighing on the rand among them growth fears and low growth and continued labour unrest.
Continuing political fracas in Turkey could also heighten the risk aversion surrounding emerging markets while uncertainty over ailing former South African president Nelson Mandela, together with the mounting risk of further strike activity in the country’s platinum sector this week could also affect rand sentiment.
There are also sceptic sentiments in SA manufacturing, mining and retail sales data.
Government’s widening budget deficit adversely impacts the exchange rate of the country as the market reacts negatively to such information. This is primarily due to the fact that the default risk premium for securities in that currency rises, making investments less attractive.
The shrinking of the government budget deficit or an expansion in the government budget surplus will have the opposite impact on currency exchange rates.
Two weeks ago, one of the mines was given an ultimatum to meet workers’ demand. These threats and more are still hanging over the heads of many mines and are some of the factors scaring investors.
The ongoing unrest in South Africa’s mining sector – which relies heavily on exports of gold and other metals – is dragging down the country’s economy.
Foreign investors are on the lookout for countries with a stable political environment since this reduces the uncertainty surrounding their investments.
Political turmoil usually has a negative impact on the economy hence investing in that country’s currency may not seem like a wise idea.
Of late, most investors have shown little interest in dealing with rand among major currencies.
Bad fundamentals. Bad headline risk. And to top it off, it seems global financial markets have all been subjected to the same earth-shaking developments in the US Treasury market, the largest and most liquid bond market in the world.
The rand is no exception. Treasury yields and the US dollar have been rising ever since fears that the Federal Reserve would begin to taper back its monetary stimulus sooner than was previously thought have seeped into the marketplace.
The rand is a ‘high-beta’ currency which means its own moves against the dollar tend to be more pronounced than those in other currencies.
The South African Reserve Bank is in a tough spot. It doesn’t have a lot of currency reserves so they don’t have the same liberty to engage in currency interventions to defend the rand’s value as some other central banks - Turkey, Brazil and Russia, for example currently enjoy.
With the rand being as volatile as can be, it is extremely difficult to get a clear picture of where the currency is heading.
Some economists think its base case is that the currency is oversold and that it will recover somewhat in the months to come.
For that to happen however, there needs to be a calm return to the labour market and strained labour relations have to be fixed. Also, the current account deficit will have to narrow.
It can be worse until till the fundamental labour issues and deficit is corrected, which will hopefully calm some nerves in the later part of 2013.
Finally, a critical assumption has to be made about what the US Federal Reserve Bank will do. As analysts, we take the view that the Federal Reserve Bank will not start unwinding quantitative easing as quickly as many people think they will and if markets readjust to that expectation, which will certainly give emerging market currencies and the rand a bit of a boost as well.
Overall, we expect the rand to trade in the range of R9.50 to 10 to the US$ on average till 2014.
A weaker currency could play a part in unwinding the current account deficit also. The weaker currency would increase competitiveness on the export side and will make imports more expensive.
However, for us as a nation weighed on imports this isn’t a very good piece of news for things like groceries from SA, petrol etc will now have a higher probability of going up regularly.
The deficit is in part the result of the nature of the local economic upswing fuelled by consumption spending which in turn drove imports.
At the same time, the export industry has been struggling due to bottlenecks and other constraints that curbed its growth.