David Le Page The rand was pummelled to fresh lows against the dollar and the pound this week, dropping below R7,70 to the dollar late on Wednesday amid increasing investor concern about Southern Africa and emerging markets in general.
Ever since May, when the currency first began to tumble, economists have been overflowing with reassurances that the currency is terribly undervalued. Some have gone as far as predicting a dramatic recovery by year-end, to what they consider its true value – the consensus among the optimists hovers around R6,50. “The rand’s overall weakness has been driven by confidence,” says Tony Twine of Econometrix, “and confidence is a difficult animal to predict in either direction or extent.”
Twine believes a series of factors have each contributed to “reducing the pressure in the confidence bubble”. He lists political instability in Zimbabwe, “peculiar announcements from the president’s office on Aids that have brought [Thabo] Mbeki’s leadership into question”, and a “deflating of confidence in world stock exchanges, as [United States] investors have woken up to the fact that earnings yields do count after all”.
Both he and economist Etienne le Roux of Rand Merchant Bank believe the oil price is also a substantial underlying factor. Oil sales are always settled in dollars. Twine points to the fact that any exchange rate stability currently leads countries to rush to buy dollars, for fear they might have to pay more for them later. Le Roux notes that the prolonged increase of the oil price is leading to global worries about inflation and interest rates. “The dollar is bene- fiting from its safe-haven status. Developing markets [which include South Africa] as an asset class are being sold off.” The Reserve Bank’s 0,25% increase in the repo rate, South Africa’s key interest rate, is unlikely to have any effect on the rand, says Twine. He characterises it as “whistling as you walk past the graveyard”, a move intended purely to send a positive psychological signal to the markets. He believes the rand may begin to recover if Wall Street merely halts its current decline. At that point he’s reasonably sure the rand may recover some lost ground. By Thursday afternoon, the currency had recovered to R7,66.