Sarah Bullen
In May 1996 the rand was sitting at R4,40 to the dollar. On Monday it touched R9,59. Why is a country whose economic and political fundamentals are sound finding itself in a position where its currency is facing demise?
Financial guru Suze Orman has an answer. “Why should anyone invest in your country if you are not prepared to invest in yourselves?” she asked an audience at Gallagher Estate last week.
It is not an answer South Africans want to hear. It is far easier to point a finger at a faceless London speculator.
If there is any logic, it rests with the tangible nuts and bolts of what actually happens in the currency market.
The market is both an open and a private one open in the sense that the Reserve Bank is, in theory, privy to all trades and private in the sense that the transactions themselves are private.
Take the following scenario: a local vehicle importer places an order for R50-million worth of vehicles from Germany, with payment due on December 15. The importer will need to sell R50-million and buy euros to settle the tab and would approach a bank.
The importer has two options: it can allow the bank to see what rate it can get for the trade or the bank can quote an exchange rate of say R8,20 and settle the bill. Market volatility makes the latter a far safer bet for the importer.
The bank will start selling rands into the market and buying up euros at the market rate of R8. If the rand starts falling to R8,10 the bank’s margins are looking tight. If the rand hits R8,20 it will trigger a stop loss in which the bank will dump rands and buy euros to cover its losses.
The ripple contagion from a small fall spreads fast. “By sheer size of an order and aggression the banks move the market,” says Mazwai and Company Securities’s Andile Mazwai.
This is legitimate as long as the dealers have an underlying transaction. If not, it is speculation and Reserve Bank Governor Tito Mboweni has made a move to police this more closely.
Dealers acknowledge there is a “grey area” in currency markets. They do not acknowledge that they play in it and say it is only there by virtue of the Reserve Bank’s lack of resolve in policing its regulations. They say an adverse market reaction in 1999 to the Reserve Bank’s move to enforce the regulation resulted in the bank turning the other cheek. Foreign banks claim they see Mboweni’s recent announcement as a new regulation rather than a rule that has never been applied. This may be one of the reasons for the drop after the announcement two weeks ago.