The South African rand will come under pressure in 2003 as foreign banks unwind the long rand positions built up since September 2002, Gad Ariovich, Economist at Anglorand Securities, said at an investment seminar on Tuesday.
These long rand positions were built up to exploit the large interest rate differential between South Africa and the other major countries.
In 2002 South Africa increased its interest rates four times with the last hike in September.
Most economists expect South Africa to cut interest rates this year and Ariovich warned that the unwinding of long rand positions as the interest rate differential reduces would put pressure on the rand.
“One of the things that one must bear in mind when looking at currencies is that capital flows overwhelm trade flows. So the rand strength did not make sense when both September and November saw reported trade deficits. Yet if one accepts that market speculation is that foreign banks’ long rand positions are in excess of $1-billion, then the rand strength does make sense,” Ariovich said.
The rand has gained more than 25% since it formed a “double-top” at R10,95 per dollar on August 21 and 22 2002 to Tuesday’s level of R8,70 per dollar.
South Africa’s foreign exchange market has a daily turnover in excess of $6-billion, while by comparison the export volume is equivalent to less than $100-million per day.
“The South African Reserve Bank (SARB) is well aware of these long positions and this is probably the reason why the governor has tried to stop speculation that interest rates will be cut shortly. The last thing the SARB needs right now is a weaker rand, as it has an inflation target to reach,” Ariovich said.
Ariovich also said that the focus should be on the trade-weighted rand, as the US dollar was likely to continue to be weak given the large US current account deficit.
“Just because the rand is stable against the US dollar… this does not always mean that the rand is strong. Just look what the trade weighted rand has done in January when the US dollar was under pressure,” Ariovich concluded.
Ariovich completed a doctorate in economics at the Rand Afrikaans University (RAU) in 1979 and has been involved in the South African investment community since then. – I-Net Bridge