Although the rand has breached five-year highs against the US dollar, its move is a dollar story rather than a rand story, says Vivienne Taberer, portfolio manager at Investec Asset Management.
“If you look at the trade-weighted rand, it closed at 61,87 on Monday, a level that is still lower than the trade weighted high of 63,55 reached on the 21st of July, when the rand was trading at R6,31 to the dollar. And relative to the euro, the rand has actually weakened approximately 3.5% since the 21st of July,” Taberer pointed out.
Over this same period, the dollar weakened by about 8,5% against the euro and 6,5% against the yen. What is happening, Taberer explained, is that small, flexible currencies such as the rand, the Polish zloty and the South Korean won, are making a lot of the adjustment against the dollar, as investors and speculators are using them as a vehicle to take short dollar positions.
Despite some fairly substantial intervention by the South Korean central bank to stop the appreciation, their currency has reached seven-year highs against the greenback, she pointed out.
“Currently, the big consensus trade in the market is to be short dollars. Everybody believes there needs to be an adjustment of the US’s twin deficits, and given recent comments by the federal reserve, the market expects this to happen through a large depreciation of the dollar.”
Investec Asset Management believes the dollar to be in a long-term bear market and to ultimately trend weaker, but warns that in the short term speculative short positions in the dollar are at record levels and a sharp correction into year-end is not inconceivable. Should this happen Taberer says the rand could see quite a sizeable short-term reversal against the US dollar from very overbought conditions.
“From a monetary policy and broader macro economic point of view, however, it is important we not lose sight of what is actually happening to the trade weighted rand. Although the rand movement against the USD is certainly material, we should be watching the trade weighted rand,” Taberer concluded. – I-Net Bridge