Contrary to public pronouncements that the rand’s strength is almost exclusively due to United States dollar weakness, the move of the rand to its best trade-weighted level since July 18 2001 gives the lie to this reason.
The trade-weighted rand has strengthened by a massive 26% since its worst level in January this year and in the past week alone has gained 2,2%.
Its level today, determined at 10.30am local time, was 58,25 compared with 57,02 on November 7, 46,16 in January 2003 and 58,43 on July 18 2001.
The US 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%), US dollar (15,47%), British pound (15,37%) and Japanese yen (10,43%).
US dollar weakness is important, but in a survey by London-based Consensus Economics, this reason is not even mentioned directly as a reason for the rand’s strength.
US dollar weakness is, however, indirectly responsible for the rise in commodity prices to multi-year highs, but once again, the recovery in industrial production in most countries of the world is probably even more important.
In the August 2003 survey, exchange rate policy rated a 6 out of 10, and commodity prices were considered more significant at 7.
Prior to this year, the government and the South African Reserve Bank (SARB) viewed the rand’s exchange rate as a given to be determined by market forces.
This changed at the time of the February 26 2003 Budget when exporters started complaining about the strength of the rand, but Minister of Finance Trevor Manuel said the rand was still undervalued.
Since then SARB governor Tito Mboweni has repeatedly affirmed that the rand remains undervalued.
The August 14 2003 monetary policy committee statement said: “The level of the real effective exchange rate of the rand was still below the index values in early 2000, leaving domestic producers in a more competitive situation in export markets than at the turn of the century.”
In the March 2003 survey, capital flows and commodity prices were the most important factors determining the strength of the rand.
Economists were asked to rank the current importance of a range of different factors in determining exchange rate movements. Scores were assigned to each factor on a scale of zero (no influence) to 10 (very strong).
Given that a wide range of factors influences different currencies, Consensus Economics asked economists to rank the traditional six factors and then other factors that they thought of particular importance.
The six traditional factors are relative economic growth, inflation differentials, trade/current account, short-term interest rate differentials, long-term interest rate differentials and equity flows.
In the case of the rand, the most important factors are commodity prices at seven, compared with the March 2003 score of eight. Capital flows, which warranted a score of eight in the March 2003 survey, were not even mentioned in the August 2003 survey.
The highest-rated traditional factor is short-term interest rate differentials at 6,3 (6,4 in March). The remaining factors are the trade/current account at 6,0 (4,2), equity flows at 6,0 (3,6), inflation differentials at 5,8 (5,8), long-term interest rate differentials at 5,3 (3,6) and relative growth at 4,3 (3,6).
On December 20 2001, the rand reached a record worst level of R13,86 per dollar, R20,0866 per pound and R12,4790 per euro and the trade-weighted rand was 36,09.
The rand finished 2002 at R8,59 per dollar, as the rand was the best-performing currency against the US dollar in 2002. Today, the rand reached its best level so far this year of R6,7050 per dollar.
The rand averaged R8 per dollar in the first half of the year after briefly moving above R9 per dollar in January, and has so far averaged below R7,25 per dollar in the second half.
The worst level so far this year on a trade-weighted basis was on January 22, when the index was 46,1640. — I-Net Bridge