The stabilisation of the rand during October and November 2004 can be attributed to expectations of significant future foreign direct investment (FDI) inflows, a possible improved international credit rating of the country by international ratings agencies and US dollar weakness, the South African Reserve Bank (SARB) said in its December quarterly bulletin, released on Friday.
The balance-of-payments position, which recorded a sixth consecutive quarterly surplus, also supported the rand.
The SARB said that after appreciating in the first two quarters of 2004, the nominal effective exchange rate of the rand depreciated by 3,2% in the third quarter. Its biggest depreciation was against the dollar and the euro.
However, the rand then strengthened by 5,2% in the first two months of the December quarter.
The SARB attributed the rand’s weakening in the third quarter to the surprise cut in the repo rate in August.
The cut dented the carry trade, which involves borrowing in low yielding currencies and investing in high yielders. On Thursday afternoon, the rand strengthened after the SARB’s Monetary Policy Committee (MPC) left the repo rate unchanged at 7,5%
While both the rand and the euro appreciated in real terms since the beginning of 2002, the rand’s appreciation exceeded that of the euro by a considerable margin.
However, the extraordinarily low base level of the rand at the beginning of 2002 should be kept in mind in this comparison, the SARB said.
The rand touched a worst ever 13,86 per dollar in December 2001. On December 3 this year, dollar weakness saw it trade at a best level since January 1999 of 5,6850.
The SARB said that the rand was also substantially more volatile than the euro since the beginning of 2002, as is evident in the coefficient of variation of 13 and 6,6 for the rand and the euro, respectively.
According to the SARB, high volatility usually has a negative influence on business and investor confidence and resource allocation.
The SARB said that the real effective exchange rate of the rand depreciated by 2,9% from December 2003 to September 2004. However, the average real effective exchange rate of the rand was 7,9% higher in the first nine months of 2004 compared with the corresponding period in 2003. – I-Net Bridge