Rand rout: No end in sight

Finweek English Edition - - INSIDE -

Mar­ket watch­ers and traders are an­tic­i­pat­ing cur­ren­cies break­ing some crit ica l bar­ri­ers in the near fu­ture. One is euro par­ity with the dollar, as the euro con­tin­ues to lose out to an ev­er­strength­en­ing dollar. The euro, at 0.9352 to the dollar on Wed­nes­day, has lost over 10% this year alone.

But closer to home, the strength of the dollar has been ev­i­dent in the rand weak­en­ing at a rapid rate, and the all­time low of R13.85 to the dollar, achieved in De­cem­ber 2001, is now in the realms of pos­si­bil­ity. Not that we are any­where near that now, but this week the rand hit a 13-year low against the dollar. It was trad­ing in the R12.34 range at the time of go­ing to press on Wed­nes­day, 11 March, and there are no signs point­ing to a re­cov­ery any­time soon.

It is easy to call this an emerg­ing econ­omy rout, but even among the emerg­ing econ­omy cur­ren­cies, t he rand has fared among the worst. David Rees, emerg­ing mar­kets econ­o­mist at Cap­i­tal Eco­nomics, said the frag­ile f ive – South Africa, Brazil, Turkey, In­dia and In­done­sia – are now three, as eco­nomic re­forms have helped re­duce the vul­ner­a­bil­ity of the In­dian ru­pee and In­done­sian ru­piah from the lat­est round of emerg­ing mar­ket cur­rency weak­ness.

The rand, Brazil­ian real and Turk­ish lira have not been as lucky. The frag­ile f ive were orig­i­nally iden­ti­fied as such be­cause they rep­re­sented coun­tries with large cur­rent ac­count deficits. What is cloud­ing the out­look is the ex­pec­ta­tion t hat t he US will raise in­ter­est rates by as early as mid-year. This af­fects emerg­ing mar­kets be­cause, as ex­plained by The Wall Street Jour­nal, “higher rates lead i nvestors to buy dol­lars, and make it less at­trac­tive to bor­row in dol­lars to fund pur­chases of emerg­ing-mar­ket as­sets”.

Rees makes the point that weak­ness in cur­ren­cies in Cen­tral and Eastern Europe ref lect euro weak­ness rather than lo­cal is­sues. The ru­pee and ru­piah were not badly af­fected as In­dia is re­duc­ing its cur­rent ac­count deficit by lim­it­ing gold im­ports while In­done­sia is re­duc­ing sub­si­dies.

But the decline in the Brazil­ian real, Turk­ish lira and the rand “ref lect con­tin­ued strains in each coun­try’s bal­ance of pay­ments”.

Ned­bank chief econ­o­mist Den­nis Dykes says that the rand weak­ness is a re­sult of the dollar strength­en­ing as the rand has not done badly against other cur­ren­cies. So this “is not a rand story”, but one of cur­rency re­align­ment.

“Against t he dol la r we c ou l d cer­tainly see weak­ness in the short term, pos­si­bly mov­ing to the R12.50 area, so short term there could be more pain,” he says. But it is not some­thing we should be wor­ried about from a South African point of view. “We have lost some ground, but are fairly much on track with other emerg­ing cur­ren­cies,” Dykes says.

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