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On Shaky Ground
Written by Ian Brink, Investment Analyst, Glacier by Sanlam
The Rand's recent tanking and subsequent partial recovery has once again raised concerns about the currency's vulnerability. Since the beginning of August the local currency has seen a weakening of approximately 60.5%, falling from its high of R7.21 to its low of R11.58 to the US Dollar. Despite the fact that the currency has regained some of its strength, it still remains highly volatile relative to the Dollar, Euro and Sterling. There are a number of reasons for the currency's volatility, the most notable being the global risk aversion which has arisen out of the credit fallout. Despite the fact that the subprime and subsequent credit crisis started out as a developed economy problem, global investors still tend to consider emerging market assets as being more risky, and hence tend to dump these whenever they become anxious about the goings on in the US and Europe. Traditionally this flight to safety would have seen an increase in the demand for Gold as a safe haven which would have had a positive effect on our local economy. However, recently investors have started to favour the protection provided by US treasuries over that provided by the precious metal. The bitter irony is that the tradability of our currency, which is underpinned by the sophistication of our financial and banking systems, makes it easier for foreign investors to dump our currency as opposed to the currencies of other developing countries. This year to date foreigners were net sellers of SA equities to the tune of approximately R40 billion compared to last year's net purchases of approximately R60 billion. Other sources of short term speculative inflows arise out of the exploitation of our high interest rates relative to that of developed countries. The practice of borrowing at low interest rates abroad in order to lend locally at much higher interest rates is referred to as the carry trade, and adds to the complexity of the Reserve Bank's decision of how to alter interest rates going forward. Both consumers and the SARB will, however, find some relief in the fact that the CPIX index which is used by the reserve bank as an inflation target measure has fallen from 13.6% in August to 13.0% in September. This shows that despite the weakened currency, the nearly 50% drop in the oil price from its high in middle July has now started to filter through. Not only have consumers benefited from the low oil price by a 45c drop in the petrol price, but if all things remain equal we could very well find ourselves at the top of the interest rate cycle. |
