It seems like just the day before yesterday (actually it was October 23 last year) that you would have to shell out R10.50 to buy a single dollar. But look at the rand now, trading last week at R8.60 to the dollar.
You may think this dollar weakness is because the United States government has poured so much money into propping up its economy, that investors fear that in the longer term this will be bad for inflation and the greenback.
But the rand is showing the same resilience against all major currencies, the trade-weighted index maintained by the Reserve Bank showing an increase from a low of 49.65 in October to 64.85 last week. The rand is up 30% compared with its October lows.
A stronger rand brings both good and bad news, of course. Motorists in particular, and consumers in general, will enjoy cheaper fuel prices. But exporters will find it harder to grow and maintain market share.
The rand had been relatively strong and strengthening despite the fact that an interest cut rate was widely expected to be announced by Reserve Bank Tito Mboweni last week.
Consumer inflation in March increased by 8.5% year-on-year compared with 8.6% in February, according to figures released by Statistics South Africa on Wednesday. The downward trend helped market expectations of a rate cut on Thursday.
The rand was also shrugging off uncertainty ahead of the announcement, expected this week, by Jacob Zuma of his choice of Cabinet.
Based on the strength of the rand, however, the markets appear to like Zuma. I asked Mike Schussler, director of economists.co.za, if the stronger currency could be thought of as the Zuma rand. His answer: “No.”
Schussler says that much of the recent improvement in the rand took place both long before the election and the decision by the National Prosecuting Authority to drop charges against Zuma. He sees three main factors behind its recovery: the re-emergence of the carry trade, an improved international appetite for emerging market risk and indications that the South African economy may recover more quickly than most.
Carry trade is where dealers borrow money in low-interest environments to chase returns in high-interest economies. The Wall Street Journal reported last week that the carry trade is making a comeback.
Carry traders borrow where the monetary authorities have pushed interest rates close to zero, and put their borrowings in countries such as Indonesia (7.5%), South Africa (9.5%), Brazil (11.25%) or Russia (13%).
The Wall Street Journal reported that investors have pushed the Indonesian rupiah nearly 12% higher in the past month.
Theoptionsinsider.com reports that there are a number of excellent borrowing currencies for the carry trader: the Japanese yen (0.10%), American dollar and Swiss franc (0.25%), Canadian dollar and British pound (0.5%).
It says that an equally weighted basket of the Turkish lira, Brazilian real, Hungarian florint, Indonesian rupiah, South African rand and Australian and New Zealand dollars, purchased with yen and dollars, produced an annualised return of 196% from March 2 to April 10.
The same trade produced a 41% annualised loss between September — when Lehman Brothers collapsed — and February.
Schussler says that risk appetite is improving, including investing in emerging markets. The rand, backed by South Africa’s sophisticated banking system, remains a proxy for emerging market currencies, meaning that investors often use rands as a vehicle to hedge risk against another currency.
The appetite for risk has improved, says Schussler, because commodity prices have seemingly hit bottom. Where prices remain under pressure, he says, the speed of downturn has slowed. “There is now a better chance that we will see growth internationally this year, but not locally this quarter, because of all the public holidays,” says Schussler. He expects the local economy to show positive growth in the fourth quarter.
Nedbank’s Dennis Dykes says that just as external factors led to the fall of the rand last year global factors are now underpinning its relative strength.
He says that lower global risk aversion has seen net foreign portfolio inflows turn positive. “The rand strength illustrates how dominant global rather than local forces are in determining its value at present. Given that much of the currency’s decline in late 2008 was due to the same forces, this is probably justified,” says Dykes.
He expects the currency to end this year roughly in its current position of relative strength on a trade-weighted basis.
Schussler says confidence is creeping back into markets. With the rand being a small currency, about 1% of world trade, small flows can make a big difference.
The fact that the elections were trouble free and the ANC did not quite achieve a two-thirds majority will have helped investor sentiment, says Schussler, adding that the market is anticipating no major shocks when Zuma announces his Cabinet.
Negatives include the fact that there is still a lot of risk in the system, the downturn is not yet over and job losses internationally could continue for some time.
The effects of the unprecedented interventions in the US and elsewhere are still unclear, while unforeseen factors, such as a possible swine flu pandemic, could all undermine the slightly more cheerful current economic environment.
In South Africa’s case the ballooning current account deficit at about 7% of gross domestic product last year, remains a risk. The stronger currency is likely to exacerbate this as it will encourage imports and depress exports.
The recent volatility of the rand also provides no cheer. South African policymakers would prefer a much more stable currency as this makes planning more predictable for the authorities and businesses alike.