27 Dec.
Emerging-market currencies have taken a pounding this year, reflecting concern over the global economy and Europe’s inability to find a long-term solution to its sovereign debt crisis, with the rand shedding 28% in value against the dollar this year.
Analysts say that for as long as jitters over Europe continue to bog down investors, who will scurry towards safe-haven assets such as US Treasuries, the rand could remain under pressure. In spite of this, the fundamentals support a stronger rand.
“What you see in the rand is not domestic fundamentals. If it was, the rand would strengthen,” George Glynos, an economist at ETM Analytics, said yesterday.
With a risk-off environment caused by the credit crunch unfolding in Europe, “the rand has responded negatively”, he said.
For the year, the rand was the worst-performing emerging-market currency against the dollar, followed by the Turkish lira and the Indian rupee, according to Bloomberg data. The fall in commodity prices, such as copper and platinum, has not helped.
Fear over weaker demand has seen industrial metals such as copper and platinum fall 22% and 19% respectively.
Over the past two years, European politicians have been battling to restore confidence in the euro as a currency because of the strain of debt levels of nations such as Greece and Portugal, and even more prominent ones such as Italy and France.
Earlier this week, euro-area banks took larger loans than forecast from the European Central Bank (ECB) in a refinancing offer to boost liquidity, depleted by the credit crunch in the region.
The move prompted demand for higher-yielding risk assets, such as the rand, which yesterday gained for the fifth day in six, rising as much as 1,5% to R8,11/$.
For the first quarter, expectations are that portfolio flows and commodity prices will support the rand, while a weak euro and strong dollar will tend to offset this, Leon Myburgh from Citi said. The rand is likely to continue to trade between R7,90 and R8,70 to the dollar, “with the risk of a spike to the upside in January”.
The European banking sector as a whole is under pressure, Jane Foley, a currency analyst at London-based Rabobank, said in a note. “The stresses in the money market have been obvious for some time.”
The ECB’s move to boost liquidity, along with talk that the Bank of England may introduce another round of quantitative easing if the UK economy continues its struggles next year, will add a significant amount of liquidity. The US, which has reported improved economic data, has been able to hold off on any talk of another round of quantitative easing for now.
There is “no guarantee it (US economic improvement) will be sustainable beyond the first quarter”, Mr Glynos said.
Europe, the UK and the US – SA’s biggest trading partners – looking at liquidity injections is tantamount to “currency debasement”, he said.
With the Reserve Bank following a more conservative monetary stance reinforced by higher inflation than in developed markets, “it suggests the rand could recover”, Mr Glynos said.
But if the developed world enters another recession next year, there will be a switch to safe-haven assets such as US Treasuries and Japanese bonds, and the rand could respond negatively, as it did after the 2008 recession. Immediately after the collapse of Lehman Bros in September 2008, and the start of a global recession led by the US and Europe, the rand shed 18% by the year-end.
Source: Times Business Live
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