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Johannesburg - Buoyed by a potent brew of easing US monetary policy, a weak dollar and a strong gold price, the rand soared to its highest levels in two and a half years, piercing the R7/$ level on Tuesday.
"It's all systems go for the rand," Brait economist Colen Garrow said, noting that gold was strong because of a weak dollar, with both factors working in favour of the rand. He said the rand was overvalued, and something needed to be done.
He was in favour of the imposition of a tax on foreign capital inflows, as had happened in other emerging market countries such as Brazil. If the tax failed to stem the foreign capital inflows, then at least it would be a source of revenue for the fiscus.
The Reserve Bank could also try to slow the currency's ascent through purchases of foreign exchange. Garrow said the Reserve Bank should have cut interest rates by more, which would have lessened the yield attractiveness of South Africa. The country's relatively high interest rates were a crucial reason for the rand's strength.
Another major factor behind the rand's strength has been the huge inflows of foreign capital into the bond market. These, Garrow said, were running at R72.3bn, which was a record high for bonds – much higher than the previous record annual inflow of R30bn recorded in 2006.
Rand Merchant Bank currency strategist John Cairns said it was all about the US Fed, which had made it known that "additional monetary accommodation" could be on the cards.
The US Federal Open Market Committee met on monetary policy last night, and their admission that core inflation, despite no longer falling, was below acceptable levels had highlighted the growing risk of deflation, which could necessitate another round of asset purchases. When the Fed buys assets, it effectively "prints" money by buying government bonds, known as "quantitative easing".
"Reference to additonal accommodation does not bode well for the ailing US dollar index, which fell to a seven-week low," Cairns said. He said the Reserve Bank would come under increasing pressure to stem rapid currency appreciation as the possibility of more monetary accommodation in the US promoted investors' search for yield.
Sanlam economist Jac Laubscher said the Fed's meeting last night gave the rand that "extra little push". He said the rand had strengthened against the dollar to the same extent as the euro had strengthened against the dollar. The euro was last at $1.33/euro – a far cry from the levels around $1.19 prevailing during the European sovereign debt crisis.
"I don't think the Reserve Bank can really change the direction of the rand. It simply doesn't have the ammunition to do so. But it can slow things down," Laubscher said.
The economists weren't keen on predicting the rand's future movements. Garrow said predicting the rand was like "trying to catch a knife".
- Fin24.com
"It's all systems go for the rand," Brait economist Colen Garrow said, noting that gold was strong because of a weak dollar, with both factors working in favour of the rand. He said the rand was overvalued, and something needed to be done.
He was in favour of the imposition of a tax on foreign capital inflows, as had happened in other emerging market countries such as Brazil. If the tax failed to stem the foreign capital inflows, then at least it would be a source of revenue for the fiscus.
The Reserve Bank could also try to slow the currency's ascent through purchases of foreign exchange. Garrow said the Reserve Bank should have cut interest rates by more, which would have lessened the yield attractiveness of South Africa. The country's relatively high interest rates were a crucial reason for the rand's strength.
Another major factor behind the rand's strength has been the huge inflows of foreign capital into the bond market. These, Garrow said, were running at R72.3bn, which was a record high for bonds – much higher than the previous record annual inflow of R30bn recorded in 2006.
Rand Merchant Bank currency strategist John Cairns said it was all about the US Fed, which had made it known that "additional monetary accommodation" could be on the cards.
The US Federal Open Market Committee met on monetary policy last night, and their admission that core inflation, despite no longer falling, was below acceptable levels had highlighted the growing risk of deflation, which could necessitate another round of asset purchases. When the Fed buys assets, it effectively "prints" money by buying government bonds, known as "quantitative easing".
"Reference to additonal accommodation does not bode well for the ailing US dollar index, which fell to a seven-week low," Cairns said. He said the Reserve Bank would come under increasing pressure to stem rapid currency appreciation as the possibility of more monetary accommodation in the US promoted investors' search for yield.
Sanlam economist Jac Laubscher said the Fed's meeting last night gave the rand that "extra little push". He said the rand had strengthened against the dollar to the same extent as the euro had strengthened against the dollar. The euro was last at $1.33/euro – a far cry from the levels around $1.19 prevailing during the European sovereign debt crisis.
"I don't think the Reserve Bank can really change the direction of the rand. It simply doesn't have the ammunition to do so. But it can slow things down," Laubscher said.
The economists weren't keen on predicting the rand's future movements. Garrow said predicting the rand was like "trying to catch a knife".
- Fin24.com
