The dollar recovery in the first week of 2005 has put pressure on the rand, which weakened to R6,1448 per dollar on January 6 from the 2004 best level of R5,5850 per dollar reached on December 29.
After reaching a record worst level of $1,3668 per euro on December 30, the dollar strengthened to a best level of $1,3027 per euro on January 7.
Such volatility in the first weeks of the year is not unusual, as in 2004 the rand moved from R6,2348 per dollar on January 6 to R7,5750, which was 2004’s worst level, on January 16.
Pessimists argue that rising United States interest rates will encourage capital inflows into the US, so supporting the dollar, and consequently the three-year bull run for the rand is now over.
Optimists, on the other hand, say the fundamental structural imbalances of rising current account and fiscal deficits in the US will undermine the dollar, which will hit $1,45 per euro before year-end.
At the current rand-per-euro rate of R7,90, that would imply that the rand will reach R5,45 per dollar, whereas if equity deals such as Barclays buying of Absa go ahead, then the consequent capital inflows could propel the rand to near R7,30 per euro and R5 per dollar.
The South African Reserve Bank (SARB) monetary policy committee next meets on February 9 and 10. Its members will be hoping that the volatility in foreign-exchange markets may have settled down by then, as a weaker rand will increase inflationary pressures.
The SARB cut by 550 basis points in 2003 and there was a further surprise 50 basis-point cut announced on August 12 2004. Further cuts this year will depend on a recovery in the rand, easing in the dollar and declines in oil prices after the Iraqi elections later this month.
Increasing oil supply will meet declining global oil demand in the second quarter of 2005, as heating oil demand is expected to ease during the spring in the northern hemisphere.
Some analysts said that with more and more storage tanks of heating oil filling up, there is now a potential for a supply glut and a further downward pressure on oil prices.
A weaker rand will, however, offset a reduction in international oil prices. Already on January 7 the daily basic petrol moved into an under-recovery situation after being in an over-recovery situation for the past three months.
This could mean that South African consumers will once again face retail petrol price increases in March after cuts in December, January and February. — I-Net Bridge