Recent talk by the European Central Bank's leaders suggests that quantitative easing could be finding a new home: in Europe. And if stimulus measures move over to the eurozone, it could spell a slight respite for South Africa's beleaguered currency.
As the currency of a key emerging market, the rand has enjoyed periods of being arguably overvalued in the last few years. Bond buying by the United States Federal Reserve under governor Ben Bernanke and the bull run of emerging markets were usually mentioned in the same breath.
Riding on the back of quantitative easing (QE) in the US, investors flocked to South Africa and foreign in-flows abounded. In 2011, as the currencies of developed markets floundered, the rand reached new strengths at about R6 to the dollar. For a while, the currency's comparative strength belied the underlying internal fragilities in the market.
But, with the introduction of tapering – the gradual reduction of the government's bond-buying programme – in the US last year, the chickens came home to roost. The markets swung violently in anticipation of the effects of a pull-back. Emerging currencies from the rand to the rupiah saw massive one-day dives every time Bernanke even hinted at tapering.
The as yet unknown effect of the slow-down made emerging market investments riskier for financiers, who became more alive to the threats underlying the South African economy and more choosy about where to park their cash. At the same time, the US signalled more healthy growth, pulling investors back to their well-developed shores.
January saw the biggest sell-off in emerging market currencies since 2009, according to Bloomberg. The Argentine peso fell 23%, the Turkish lira was down 6%, the Russian rouble plunged 7% and the rand fell 7.5% to a low point of 11.38 to the dollar in January – its biggest one-month plummet since 2008.
Talk of the emerging markets bull run was replaced by rhetoric about the "fragile five".
The rand has since recovered somewhat, and is now hovering around R10.50 to the dollar. Many experts, such as Finance Minister Pravin Gordhan, argue that it is still undervalued by about 15%.
Nevertheless, there are signs that another currency strengthener could be on its way. The source is South Africa's now proven fair-weather friend, quantitative easing. The origin has moved from the US to the European Central Bank (ECB).
QE and the ECB
Following the spring meetings of the International Monetary Fund and the World Bank, ECB president Mario Draghi said on April 12 that the strengthening of the euro would require further accommodative intervention.
"The strengthening of the exchange rate would require … further monetary policy accommodation … further monetary stimulus," said Draghi, according to reports.
"It's become more and more important for price stability."
Although some view his comments as merely a warning, many analysts agree that his actions indicate an intention.
"It's 100% likely that it will happen," said George Herman, head of South African investments at Citadel Wealth Management. "They [the ECB] are doing a great job by exhausting other measures first. And Mr Draghi's vagueness is actually brilliant," because it stops speculative movement in the market to some extent." But now that the ECB has made noises about quantitative easing, said Herman, it would be dangerous not to follow through.
Others are more sceptical. "I would be very surprised to see the ECB doing anything of the size or magnitude of the US or Japan," said Nedbank chief economist Dennis Dykes, referring to a massive quantitative easing programme undertaken by the Bank of Japan last year.
European QE and the rand – a potentially happy marriage?
But the effects of quantitative easing by the eurozone on the rand are yet unknown. If – or when – the ECB begins its programme, it is expected to have some local impact by decreasing risk for investors and thus luring them back to the higher returns offered by emerging markets such as South Africa.
"Speculators are vultures and they do the same things when provided with the same opportunities," said Herman. If European QE kicks in, "we will see a flow of hot money coming into South Africa".
In the short term, this would likely serve to strengthen the rand. "It will extend some of our problems further into the future," said Herman. "That will give us the opportunity to get our house in order," he said. It will buy time to address the internal factors such as labour unrest and twin deficits that underlie the currency's weakness.
But in the long term, said Herman, "that money is very dangerous money for us. South Africa will act as a life raft in a very turbulent sea."
And its effect could be greatly tempered by a number of factors, said Citi currency strategist, Adriaan du Toit.
"Did you know what would happen to the rand in response to quantitative easing or Fed tapering?" Du Toit asked. "The answer is probably no. It's a very similar dynamic here.
"The real effect will depend on what they do, how they implement it, the global backdrop at that point in time, and what the Fed is doing at that point."
Dykes agreed. "All things being equal, it should be positive for emerging market economies, including the rand," he told the Mail & Guardian. "But there are misconceptions around quantitative easing and its purported effects. I think the physical effect is often exaggerated."
And its effects could be unpredictable. For example, said Dykes, the $1.4-trillion stimulus programme undertaken by the Bank of Japan was hailed as positive news for emerging markets, but in many ways the consequences have been the opposite.
"Initially, the price of emerging market deals came down but then people realised the money wasn't flowing, and prices and currencies [came under pressure]," he said.
"I've always maintained that we should rather hope for economies overseas to recover strongly. That would be much more beneficial to us than getting short-term money through quantitative easing."