/ 5 May 2004

Global economy change will weaken rand

The recent change in the global economy away from an extremely stimulatory monetary policy will weaken the rand, but this does not imply a collapse in the rand, head of market and economic research at Investment Solutions (IS) Martin Jankelowitz said in his latest economic commentary.

IS has been consistently bullish on the outlook for the rand. It has been more bullish than consensus and it continues to maintain the view of the rand being stronger for longer.

This bullish view has been largely premised on the global environment being the key driver of the rand.

Specifically, Jankelowitz has pointed to rising commodity prices and extremely, and artificially, low United States interest rates as the primary drivers behind the resource-based currencies, including the rand.

The reflation theme that has been dominating the global environment has resulted in a “sea of easy money” prevailing. IS emphasised that this is positive for commodity prices and emerging markets.

Obviously the rand’s recovery from the extreme oversold position at the end of 2001 also played a role in its strength over the past two years.

IS said that while it cautions against thinking an extreme or complete change has materialised, one should nevertheless acknowledge the environment has changed over the past few weeks.

Specifically, the environment of extremely stimulatory monetary policy as well as the trend of rising commodity prices has experienced a change in sentiment.

Combined with a likely turning point in US monetary policy, commodity prices have weakened, following a stupendous rally. Commodities have benefited from both the “sea of easy money” environment as well as from strong demand from the likes of China and India.

A reversal in the “reflation trade” has seen large open speculative positions in commodities being closed out.

In addition, the Chinese authorities have clearly stated a desire to slow their economy down from the lofty growth levels that have been prevailing.

China has been a significant source of demand for commodities. Any slowing in Chinese economic growth will affect commodity prices and have implications for resource-based currencies. Both gold (-10%) and platinum (-16%), approximately 24% of South African exports, have declined from their highs. Indeed, platinum’s entire decline has been over the past two weeks.

Importantly, IS has repeatedly emphasised that the rand’s strength has to be seen in a global context, and similarly any weakness must be seen in the same light.

The rand strengthened along with other resource-based and high-yielding currencies. Recent rand weakness has also been accompanied by weakness in the other resource-based currencies. In other words, the rand continues to behave “normally” within the global foreign exchange markets.

IS has repeatedly used the analogy of the four seasons and referred to the rand as a “summer” currency. As long as the cycle remains (specifically rising commodity prices, extremely stimulatory US monetary policy and the global search for yield), the season of summer will prevail.

However, when the cycle turns and “winter” comes, the rand (along with the other resource-based currencies) will be vulnerable.

“We must emphasise, however, that we do not believe ‘winter’ has arrived. Rather, we wish to highlight that the risks to the resource-based currencies have increased.”

Overall, IS maintains its view that the rand will be driven by the global environment and will continue to track the other resource-based currencies such as the Australian and New Zealand dollars. Therefore, while IS acknowledges that some key support factors for the rand have waned, because the rand is essentially trading around its fair value, it does not expect a collapse in the currency. — I-Net Bridge