With war in the Gulf almost inevitable, financial market jitters are at a height as players try to ascertain what consequences a conflict is likely to have. When it comes to the rand, economists are divided, agreeing only that the currency’s direction in the likely event of a war is difficult to call.
“Up until now, any war talk has been detrimental to the US dollar,” said George Glynos, market analyst at MMS International. He said an important question was whether the old adage of “buy on the rumour and sell on the fact” would apply.
Glynos noted that when the 1990/91 Gulf War started both the dollar and Wall
Street rebounded quite impressively.
“Because the situation now is different, there might be a bit of a rally [in the dollar], but I don’t think it will be sustained. A war is likely to be negative for the dollar and positive for the rand,” he concluded.
However, Mike Schussler, economist at Tradek, offered a different view.
“I think the beginning of the war will affect the rand positively as the gold price goes up,” he said. However, he cautioned that this effect was likely to be short-lived, with
the rand falling again in tandem with the gold price.
“As the gold price falls again, so will the rand,” he explained. Schussler explained that in the previous Gulf War, gold had spiked briefly just before war started, but had soon fallen back again.
“Markets are difficult to read at the moment. We won’t know the rand’s longer-term direction until the war is over,” he concluded.
PLJ Financial Services economist Dawie Roodt asserted that war would be good for the dollar, and therefore bad for the rand. “I think the dollar will strengthen because of its save haven status. That is also what happened in the previous war.”
He added that the rand’s move was likely to be in line with other currencies, such as the euro.
“I don’t think the rand will fall hugely out of bed,” Roodt asserted. He cautioned, however, that the rand was likely to depreciate over the longer-term in any case.
“Now we have the additional issue of war, but over time the rand should weaken anyway. The first reason for this is that the inflation rate here is higher than in the US. The second reason is that our current account should dip into deficit soon, which will leave the currency potentially vulnerable.”
Roodt explained that with a current account deficit, a crisis locally or internationally could see the rand take a knock. “In the meantime, we have a current account surplus, which means the rand is not as vulnerable. As soon as the current account dips into the red, it will be more vulnerable.”
In real terms, the gold price is at the average of where it has been over the past ten years, Roodt noted. He said that it had fallen when the last Gulf War started and that it was likely to fall again.
A recent survey by London-based Consensus Economics shows that capital flows and commodity prices are the most important factors determining the strength of
the rand. – I-Net Bridge