Rand rout: No end in sight
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.