Our currency isn’t alone (get Real)

The Rand is much stronger against the US Dollar now than any time in the last 18 months. Aside from a brief blip at the end of 2007, it’s actually back to 2006 for the Rand to be stronger.

Given that our inflation has been higher than US inflation by some margin at every point in the last decade (and probably more, but I haven’t confirmed) and that our interest rates have been higher too, both Relative Purchasing Price Parity and Absolute Purchasing Price Parity would suggest that our currency should weaken against the US Dollar over time.

The arguments against Purchasing Price Parity (PPP) are that maybe it holds in the very long run, but every other time currencies fluctuate wildly from the theoretical level and it provides hardly any information for estimating directions of currency in the short term. Sentiment, short-term capital flows, the prevalence of carry trades and outright speculation play a far more important role in the day-to-day and month-to-month currency fluctuations.

This graph (on a semi-log scale) shows both the long-run depreciation and the shorter term spikes and deviations.

USD-ZAR history on a semi-log scale
USD-ZAR history on a semi-log scale

From this graph, it’s not entirely clear to me that the recent appreciation isn’t mostly about a correction from a rapid depreciation resulting from a flight to quality as cash was pulled out of everywhere except the USD and T-Bills during the Global Financial Crisis.

That’s not to say the sudden appreciation can’t still cause economic havoc in terms of the competitiveness of our exports. (It’s also bringing disinflation and affordable goods for consumers.)

But this is not a story about the Rand. This is a story about the global economy, the reversal of the flight to quality as investors seek yield, the gold bull market and huge capital flows.

Many emerging markets, such as Brazil, have rapidly strengthening currencies that are posing serious concerns to their economic well-being. Brazil is buying billions of dollars to temper the Real’s appreciation.

It wasn’t that long ago that Chris Stals was doing everything in his power to prop up the Rand in an ill-fated battle with currency speculators with bigger toys. There are no easy or obvious answers here, but I wish I had more faith in those who are making the decisions.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. Interesting article. I believe that what we are seeing is not entirely reflective of the value of the Rand. A couple of points, our economy is actually quite stable, so many international investors are putting cash here in the short term. The Nedbank and recently Massmart announcements are causing currency speculators to bet on a stronger Rand. These two factors can easily reverse very quickly and a swing to $1=R8 could happen in a few days. I am no expert, but just my 5c. One last comment, the time is perfect for the reserve bank to drop currency controls for private individuals. What better way to cool the currency and give some faith to international markets.

    1. Stable (relatively, even if stable unfortunately implies way too high unemployment) and decent yields! As long as the money flows in, the currency appreciates and the return to foreigners is a great yield PLUS appreciation. When the tide turns and the currency starts to depreciate, I suspect there will be a mad rush to pull money the hell out and not be the last man standing.

      To my mind, remaining currency controls are more of an issue in terms of the admin and logistics. You have to have a serious amount of money to bump up against the limits at the moment. Certainly high enough that the votes that are affected really disappear in the rounding. I also wonder how much outsiders really care about this. The “markets” don’t seem to have been perturbed by the nationalisation debate so I suspect there are bigger fish to fry in their minds.

      But overall, yes, agreed, there are definite risks to the currency (probably both on the upside and the downside). If I were heavily exposed to currency in the short time I’d be hedging.

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