Is the rand set for another slide?
While we've been focussed on insurance industry issues, various global economic events are placing pressure on the domestic economy. Listed equities on the JSE have been trading lower - and the rand has lost ground against the currencies of our major trad
There have been many debates about the ideal trading value of the South African rand. The truth is the actual value of the rand is of less importance than the stability of the currency. A strong rand assists in keeping inflation in check, but also boosts imports and causes current account problems -while a weak rand puts upward pressure on prices and boosts exports.
Businesses prefer a stable rand as it facilitates long term planning and forecasting.
Worries over US economy remain
South Africa is still considered a developing economy and will continue to bear the brunt of capital flows due to international investor uncertainty. Most of the recent rand instability can be attributed to such investors moving their money out of risky assets, particularly those held in emerging or developing markets. When big international investors get scared, emerging market currencies like ours suffer -while old world currencies like the Swiss franc and Japanese yen benefit.
Try as we might, and despite all the strong fundamentals in the local economy, we cannot escape the stranglehold the US economy has on the entire world. Negative news from the worlds economic superpower, and there has been plenty of that recently, sends immediate tremors to markets around the world.
We can identify a number of major concerns in the US at the moment. These concerns are in the key areas of property, credit extension and retail sales.
The US property market is in trouble. Both the volume and value of new house sales is under severe pressure at present. Experts also predict that the number of mortgage loan defaulters in the US will increase substantially this year. Linked to this problem is the fact that many financial institutions have been offering 'sub-prime' mortgages with largely unprotected exposure to the property market.
In addition to the housing crisis, forecasts for retail sales remain disappointing too. It is therefore not surprising that US stocks have come under significant pressure in the last few trading days.
Domestic cross-border problems could escalate
On the domestic front, the continued political turmoil in Zimbabwe cannot be ignored. Economies thrive on stability -and it is increasingly difficult to paint a picture of such stabilitywhen an immediate neighbour is spiralling out of control.
Latest reports from Zimbabwe are that the leader of the main opposition party, Morgan Tsvangirai, was arrested while attending a political meeting, beaten up and subsequently sent for a brain scan at a Harare hospital. Images of his beaten face have been beamed to television viewers around the world - and prompted condemnation from many sources.
Not surprisingly, the South African government has remained tight lipped on the affair -towing the line that Zimbabwe's problems should be resolved internally by Zimbabwe's people.
Still range bound
While the rand continues to trade in a narrow range (between 700c and 750c to the dollar) it is now consistently trading at the upper end of this range. Weve seen the currency push through the upper level a couple of times, hitting a low of 754c to the dollar early last week. It has since rebounded slightly and is now trading nearer the 745c level.
Traders will be watching the market carefully for new data that might impact on the currency. For now, we're happy with the rand at current levels.
Editors thoughts:
The rand has enjoyed a number of years of relative stability, especially when we compare todays trading range against the near crisis situation at the end of 2001. At R7.50 to the dollar, the rand is probably fair value. Do you think well see a repeat of the 2001 rand slide? Send your comments to [email protected].
