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.
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.