Rand rout may continue, economists warn

Given current fundamentals it seems that the rand can easily depreciate further from its current five-year lows against the dollar, economists have warned.

Besides the labour unrest plaguing the mining industry, factors such as the deteriorating economic landscape, high unemployment and an unsustainable large current account deficit (the largest compared with other  emerging markets) continue to unnerve investors, said Maarten Ackerman, Investment Strategist at Citadel Asset Management.

He said in addition to these home grown issues, the currency also experienced headwinds from the international landscape. 

“Most emerging market currencies came under severe pressure after the US Federal Reserve hinted in May last year that it may start reducing its quantitative easing programme.

“As a result, many emerging markets experienced strong capital outflows as global investors’ sentiment turned bearish, resulting in them re-allocating capital back to the US on the expectation of higher future US interest rates.”

These capital flows weighed and is still weighing on most emerging market currencies, especially after the Fed indicated at its last meeting that it will be reducing its current stimulus programme by $10bn a month starting in January 2014, he said.

The rand, which breached the R11.00/$-level on Thursday for the first time since October 2008 and closed at R11.10/$ on Friday, remains vulnerable in the event of a deterioration in risk appetite for emerging market assets.

Ackerman said that most fundamentals suggest that the currency is likely to trade in a range of 10.00 – 11.50 over the medium term with a potential risk for further depreciation.  

Stuart Kantor of Kanan Wealth said the upcoming national elections and the associated political uncertainty is also making many investors cautious about where to invest.

“With the prospect of faster relative growth coming out of developed economies such as the US, Japan and Europe, many investors prefer to position themselves in these markets versus our volatile and sluggish SA economy, and this seems to be increasing,” he said.

He added that the South African economy, together with other emerging markets, is vulnerable to foreign flows as global investors make the (often daily) choice between risk and return on investment.

“The volatility of the rand is a major concern for investors, and uncertainty in markets such as the mining sector are assisting in driving this trend.”

Economist Mike Schussler said the depreciating rand is not good for inflation and interest rates may need to be raised quicker and higher than many would have hoped for.

He said consumers should brace themselves for interest rates (prime) closer to 10%…  “no more overseas holidays, cars, iPhones, etc.”.

“The dollar rose against the rand faster than any emerging market currency – more than 25% in just over a year… no one is losing what we’ve lost.”

Emerging market economist Peter Attard Montalto, however, said it was not domestic factors driving the rand through R11/$. “Instead, it seems to have been a strong dollar and cross-emerging market contagion issue, particularly from events in Turkey.”

He said the USDZAR move is orderly, so there will likely be no intervention or emergency rate hike.

“If the rand progresses similarly to 12.0 in an orderly fashion, then there also is unlikely to be any monetary policy reaction.”

He admitted that with Reserve Bank concerns about wages and expectations still present, an early interest rate hike is an increasing (theoretical) probability. 

“However, we still think it is unlikely because of the MPC’s debates on the impact of rate hikes on consumer and non-performing loans and the election.

“Hence we stick with May (for the earliest change in monetary policy),” he said.


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