OWN CORRESPONDENT in Johannesburg | Wednesday 10.30am.
LIQUIDITY in South Africa’s foreign exchange market has dropped significantly in line with the Reserve Bank’s policy to tighten liquidity to keep currency speculators from pulling out of the market, the Bank’s head of international banking Bertus van Zyl said on Tuesday.
Reserve Bank monthly data released on Tuesday showed that the average daily turnover of the South African forward exchange market in July fell by 58,3% to $707-million from $1,696-billion in June. Spot market activity dropped 50,1% to $1,582-billion in July from $3,222-billion in June. Both forward and spot activity have dropped further in August, Van Zyl said.
The Bank’s policy of withdrawing from currency market intervention in order to tighten liquidity and force speculators out of a short dollar position is starting to have an effect on the rand, Van Zyl said. “Since July 3 we have been very quiet in the market to make it more difficult for speculators to cash their positions or take new positions. This is possibly why the rand has been more stable, as the speculators have had to reverse their short selling and go long on rand,” Van Zyl said.
Short selling is in anticipation of a fall in the currency, where speculators sell rand before actually having bought them. The speculator then buys the cheaper currency, with his profit still the difference between sale and cost price, although the timeframe works in reverse.