Talk is cheap

Ver­bal bar­rage at odds with the of­fi­cial data

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN gre­tas@fin­

WHEN A SOUTH AFRICAN cen­tral banker uses the phrase “to lean against the wind” with re­gard to the cur­rency mar­ket, it sends shiv­ers down the spine. That’s pre­cisely the phrase for­mer SA Re­serve Bank Gov­er­nor Chris Stals used in 1998 when he wasted US$10bn in a fu­tile at­tempt to pre­vent the rand from weak­en­ing.

Of course, the cur­rent sit­u­a­tion is rad­i­cally dif­fer­ent to what pre­vailed in 1998. How­ever, Re­serve Bank Gov­er­nor Tito Mboweni and of­fi­cials at a strat­egy meet­ing of the Bank’s Mon­e­tary Pol­icy Com­mit­tee on 8 June de­cided the Bank’s at­ti­tude to­wards volatil­ity in the cur­rency mar­ket should be to “lean against the wind”.

This time around – un­like 1998 – the is­sue is that the rand may have be­come too strong. The cur­rency moved fast, go­ing all the way from US$1/R9,50 to US$1/R8,50 in April and then in May, and early June briefly break­ing through the US$1/ R8 level be­fore trad­ing slightly higher than that level at the time of writ­ing.

When the rand broke through US$1/R8, Mboweni took the highly un­usual step of phon­ing news agen­cies Bloomberg and Reuters to in­di­cate the rand was reach­ing “un­help­ful” lev­els. Of course, as a cen­tral banker, he couldn’t sim­ply say: “I think the rand is too strong and I’m go­ing to in­ter­vene in the mar­ket to try and stem the tide.” But that’s what his com­ments boiled down to.

How­ever, what’s odd is that of­fi­cial statis­tics don’t bear out what Mboweni is say­ing. If the Bank had wanted to “lean against the wind” in May – when the rand had reached sur­pris­ingly strong lev­els – it would have bought US dol­lars in the mar­ket. Those dol­lars would have been bought in ex­change for rand is­sued by the Re­serve Bank. The ad­di­tional de­mand for dol­lars and ex­tra sup­ply of rand would have worked to put a brake on the rand’s strength.

Such a move would have been ev­i­dent from the Bank’s monthly release of its gold and for­eign ex­change re­serves. One of the ways in which the Bank builds re­serves is to buy US dol­lars in the mar­ket; this, then – in the­ory, at least – pro­vides the Bank with dol­lars to use in fu­ture when it wants to do the op­po­site: fight rand weak­ness by sell­ing dol­lars to dampen the green­back’s strength.

How­ever, the lat­est re­serves fig­ures sug­gest the Bank was hardly ac­tive in the forex mar­ket, if at all. Some an­a­lysts were fooled by the rise of $1,7bn in the head­line num­ber of the Bank’s re­serves; but there were tech­ni­cal rea­sons for that in­crease. The bulk of the in­crease re­flects about $700m Gov­ern­ment raised off­shore with a bond is­suance; that money went straight to the Bank and didn’t re­flect ac­tiv­ity in the cur­rency mar­ket.

Most of the rest of the in­crease in re­serves is due to val­u­a­tion ef­fects: a higher US dol­lar/gold price as well as the rise in the value of the euro the Bank holds in its re­serves.

Rand Mer­chant Bank cur­rency strate­gist John Cairns says: “De­spite what oth­ers may be say­ing, I’m con­vinced the Re­serve Bank didn’t buy US dol­lars from the mar­ket in any mean­ing­ful size in May. The $1,7bn rise in gross re­serves can be ac­counted for by the $700m de­posited at the Bank by the Gov­ern­ment and $950m in val­u­a­tion ef­fects. That im­plies they bought a mere $150m – smaller than the $400m that would im­ply any real ac­tiv­ity. The jaw-jaw nev­er­the­less con­tin­ues…”

Cairns doesn’t re­fer to that, but it’s sig­nif­i­cant that the Bank didn’t try to mop up the for­eign cap­i­tal in­flows re­lat­ing to Voda­fone buy­ing a big­ger stake in Vo­da­com, which would have been an es­ti­mated $2,5bn. That the Bank al­lowed the flows to go through the mar­ket showed that – de­spite the rhetoric – it was happy to see the rand strengthen for a while.

Mboweni will now have to put his money where his mouth is or risk los­ing cred­i­bil­ity. The Bank will have to be­come more ac­tive in the mar­ket. The ques­tion is: At what level of the rand will the cen­tral bank start buy­ing US dol­lars? Given the in­ac­tion up un­til US$1/R8 – plus then the sud­den ver­bal bar­rage – it would seem as if R8 is the magic level. How­ever, Mboweni and his of­fi­cials in­sist they don’t have a spe­cific level in mind.

Wasted $10bn. Chris Stals Lean­ing against the wind. Tito Mboweni

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