Contrary to public perception, the rand is 1,9% weaker now than it was on September 4, the day before the surprise monetary policy committee (MPC) meeting for September 10 was announced.
The popular perception is based on the move of the rand from R7,25 per dollar on September 4 to R7,04 per dollar today.
The United States dollar is, however, only one of 13 currencies that make up the trade weighted rand and is not even the most important.
The four most important currencies with their weights in brackets are the euro (36,38%), the US dollar (15,47%), the United Kingdom pound (15,37%) and the Japanese yen (10,43%).
Although the rand has gained 3% against the US dollar between September 4 and October 14, it has lost 4,2% against the euro, fallen by 3,2% against the Japanese yen and dropped by 2,2% against sterling.
In December 2001, the rand reached a record worst level of R13,86 per dollar, R20,0866 per pound sterling and R12,4790 per euro. It finished 2002 at R8,59 per dollar, as the rand was the best performing currency against the US dollar in 2002. On October 7, the rand reached its best level so far this year of R6,79 rand per dollar.
Most economists believe now that the rand will stay stronger for longer against the dollar, but this largely reflects dollar weakness rather than rand strength.
On a trade-weighted basis, the rand’s strongest level so far this year was on October 7, when the trade-weighted rand index was 57,8137 compared with today’s 56,3446.
The rand bulls argue that recovering commodity prices boost commodity-based currencies such as the Australian dollar and the rand.
The Australian dollar has recovered from a worst level of 48,61 US cents per Australian dollar in September 2001 to a best level of 69,42 US cents per dollar last week.
In 1999 commodity prices did recover, but although the current account improved by 1,2 percentage points from a deficit to GDP ratio of 1,7% in 1998 to 0,5% in 1999, the rand did not react and stayed stable against the US dollar.
The rand bears argue that interest rate cuts this year will rob the rand of its attraction for the carry trade and the rand will therefore weaken.
Although South Africa cut its prime rate eight times in 1999 from 23% in January 1999 to 15,5% in October 1999, the rand did not react and stayed stable.
On June 12 2003, when the MPC announced the first interest rate cut since September 2001, the trade-weighted rand index was 49,8923, or 12,9% lower than today’s index.
The MPC then cut interest rates in August and September and is expected to do so again on Thursday. — I-Net Bridge