Just over a year ago South Africa’s northern neighbour, Zimbabwe, went to the polls and controversially re-elected Robert Mugabe as president. The election results briefly put the brakes on the rand’s recovery.
The rand was trading at around R12 per dollar at the time — better than the all-time worst level of R13,86 it touched on December 21, 2001, but a far cry from the R7,50s where it is trading at present.
When the rand was the world’s worst performing currency in 2001, the crisis in Zimbabwe was frequently cited as a reason for the local unit’s downward spiral.
Now that the rand has been the best performer in 2002 — and so far in 2003 — the turmoil in Zimbabwe continues unabated. However, South Africa’s bad neighbour has fallen off the currency market’s radar screen — a point illustrated by the fact the rand continued to firm in February, when it broke below R8 per dollar for the first time since June 2001, despite the devaluation of the Zimbabwe dollar.
MMS International market analyst Michael Keenan said that in order to understand why Zimbabwe was not having a negative influence on the rand, one needed to understand why the currency was strengthening.
Reasons for this include interest rate differentials, the improved gold price as well as the weaker dollar against the cross currencies, he says.
He continues that when the rand was weakening, there was a lot of negative sentiment, which aided speculation against the currency.
“It all comes down to checks and balances. When it was depreciating, it was a no-brainer to short the rand. Our interest rate differentials were not strong enough to counteract the daily fall in the currency. The rand fell far faster than what the interest rate differential was, so it was a one-way bet,” he explains.
He continues that now, the opposite is happening. Four rates hike last year mean that our interest rates are high, which makes speculating against the rand expensive.
Keenan adds that that last year’s Myburgh Commission into the rand’s depreciation helped stop speculation. The Reserve Bank also clamped down on speculative trades.
“It comes down to which way it makes sense to make money. If it makes sense to short the rand, people will push any negative factors that can be found,” he asserts.
He says the same applies to markets world wide, with sentiment basically justifying the fundamentals. If the underlying fundamentals suggest the rand should strengthen, people will ride the reasons for this.
On the million dollar question of whether the rand’s rally against the dollar has run out of steam, Keenan says that the Monetary Policy Review will play an important role.
“If Reserve bank governor Tito Mboweni comes out with a dovish stance which rekindles the hope of a rate cut in June, it will be negative for the rand as it will cut short the carry play for the currency. Then R7,50 will prove a tough floor.”
Conversely, if Mboweni’s remarks are hawkish, it will inspire the rand bulls to take the currency below R7,50, he forecasts.
Currency traders are also confident that Zimbabwe is not having the effect on the currency market it used to.
One asserts that part of the reason for this is that bigger news stories such as Iraq have bumped it off the front pages of the world’s newspapers.
“Zimbabwe is not making headlines as much as it used to. People are not interested as much as they were,” says one.
A second trader agrees. “The news out of Zimbabwe has been pretty quiet,” he says. “For now, Zimbabwe is out of the picture unless there is some big blowout.”
However, positive news out of Zimbabwe, like the resignation of Robert Mugabe, would capture the market’s attention, he says.
“I think it would be fantastic. The rand would definitely take some heart from that.” – I-Net Bridge