PICK of the MONTH
Aworld in conflict leaves currencies jittery but, in the muddled economic world, there is a positive picture for the rand. The currency isn’t in a bad place in 2023. Let me walk you through my thinking.
The globe is profoundly misaligned. Russia is at war and in world currency terms that’s bad, just ask those countries that buy energy (gas, oil and coal) from Russia. This supply is huge and extends around the world. Energy costs have doubled in the UK and are rocketing in Europe. In fact, load-shedding in SA may be a better option. Consumers don’t pay high prices if they don’t want electricity. Everyone is shut out. You can opt for a generator if you do want it. Freedom of choice.
The global economy can’t grow without energy. Therefore, the first call on currency in 2023 is whether energy demand and supply will settle at acceptable prices. You cut out Russian production, as is shown, and energy prices soar. There is no quick solution to substitute Russian energy. This is a big negative in 2023.
Russia’s economy is growing, backed by the industries that benefit from war, such as defence and security. Putin and the oligarchs can fund the war as they have trillions of dollars, so there’s no big rush to build peace. In fact, China and Russia have fallen in love, which is bad for world stability and currencies.
China is forecast to grow by 5% in 2023 and would support an alliance with Russia against the rest of the world. They could certainly hold the world to ransom. In such uncertainty, the dollar will prosper.
High interest rates are in play, which is bad for global growth. The US leads the world and believes decreasing inflation to acceptable levels comes before lower interest rates to boost growth. It’ll be difficult to grow as inflation is now at 6%, whereas the Fed wants it at 2%.
The UK is in bad shape with high energy costs, high interest rates and high taxes. No surprise a recession is forecast. Only the depth is in dispute. So the pound is not a good place to be in 2023.
Germany is the powerhouse of Europe but it also has no energy and is scrambling for gas. Couple that with high interest rates and it’s not a pretty picture. However, its financial sector has strengthened after the UK walked away from Europe. Maybe an early punt in 2023?
There lies further conflict. Euro, yes the UK, no.
Japan’s economy is vibrant. Japanese consumption always means global trade. However, there is little growth in 2023, at least until the global supply chain stutters into life. However, the yen will strengthen as interest rates, which have lagged, rise. Good bet.
Of the Brics countries, India is forecast to grow by 7%. The world’s fastest growing economy, it is lowering tax rates at a time when it has a neverending supply of cheap and semiskilled labour to grow GDP. Maybe the Indian rupee?
The rand floats, while continuously buffeted by the dollar. Sure, there are small noises out of SA. Land restitution and Ramaphosa’s cattle are big for us, but not globally.
SA has a sophisticated foreign exchange market. Good and bad for currency trade. Bad because the rand can get pummelled on negative news but ultimately good because it has a huge dollar market and can trade billions of dollars daily. Being able to get in and out of a rand position creates demand and gets the currency noticed. In marketing terms, the foreign exchange version of sponsoring Tottenham Hotspur.
SA is aligned with the rest of the world in that there are high interest rates, limited growth and a battling consumer in the year ahead. However, SA has very little political pressure, despite internal rumblings. The country doesn’t shoot down balloons or send tanks to Ukraine.
I am neutral on rand risk going into 2023. I am calling a neutral R17/$. I don’t see a blowout or a rampant rand. There are too many bad parts to the global economy.
Technicals aren’t far off my view. The currency wants to get stronger on trendlines at about R17.50/$ and R16.50 may be the topside for the rand this year.
On forward contracts, lock in at R17/$ but certainly avoid risk by picking up some of your contract in the broader band. If trading private account, insert “mental stops” in the band.
The rand has a chance to be more positive in 2023. Maybe closer to R16/$ as SA could be rewarded for avoiding the global noise. The rand is currently at around the R18/$. In that region look to buy.