Emerging market currencies are under siege and the rand has been one of the worst performers.
The unit came close to R8.6 to the dollar in the early hours of yesterday – a level last seen in May 2009. It recovered as the day progressed to trade at R8.4874 by 5pm.
Sovereign risks in Europe are creating currency volatility and prompting investors to pull out of emerging markets, perceived as risky, to invest in traditional safe havens like US treasury bonds.
According to Jeff Gable, the head of macro and fixed investment at Absa Capital, the rand has fallen 17.45 percent against the dollar over the past six months, while the Hungarian forint is down 17.4 percent, the Mexican peso 16.91 percent, and the Polish zloty 16.48 percent. One of the few emerging market currencies to gain against the dollar is the Chinese renminbi, which is up more than 2 percent.
However, Gable said it would be a mistake to make too much of the fact that the rand was the biggest loser. He noted other currencies had also performed “dismally”. The Turkish lira has fallen 14.3 percent, the Indian rupee 13.2 percent and the Brazilian real 12.6 percent. “And all except India’s are carry-currencies that will tend to wax and wane with global risk appetite.”
Carry-currencies offer attractive returns, encouraging people to borrow in currencies with low interest rates to take advantage of the rate differential. But investors are fickle and the flows are known as “hot money” because they move in and out swiftly.
South Africa’s repo rate is at a record low of 5.5 percent. However, this is substantially higher than policy rates in many advanced economies where rates are close to zero.
Nedbank Capital said: “Domestic fundamental factors do not justify further sharp short-term rand depreciation.
“However, the turnaround in foreign portfolio flows as global risk appetite reverses, has added to pressure on the rand exchange rate.”
Leon Myburgh, a strategist at Citi, said non-residents had sold a net R5.6 billion worth of South African bonds and shares over the past five days. And, in the year to date, net portfolio inflows total only R22.4bn, compared with R89.4bn last year.
The rand, which has been trading in a range of about R7.7 to the dollar and R8.59 since September, is threatening to fall further due to unresolved US and euro debt problems. South Africans may have to adjust to life with a weaker currency.
The immediate impact of a weaker rand has been offset by lower crude oil prices. Tony Twine, the senior economist at Econometrix, said benchmark Brent crude had fallen from $116 (R985) a gallon two weeks ago to $106 and $107 in the past two days.
As a result the petrol price is likely to fall 32c in December. The price is adjusted monthly to keep it line with prices of a basket of oil products.
However, international prices of diesel, heating oil and paraffin are rising due to the demand in the northern winter.
The trend was likely to push up local prices by 33c next month, Twine said, and noted it was difficult to quantify the relative impact on inflation of the two divergent trends.
If rand weakness persists, exporters could benefit, either selling higher volumes or earning higher prices, in the best case both. However, many economists are sceptical of the benefits at a time when demand is weak. The euro zone, one of the major destinations for local exports, is expected to contract next year. And exporters, like all manufacturers, will eventually face higher input costs.
Source: IOL Business Report
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