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THE rand reached levels last seen years ago in December. On the face of it, this makes it all the more surprising that the Reserve Bank has been so reluctant to intervene in the market to weaken the currency.
Even after weakening by about 20c/$ since the start of the year, the rand remains very strong.
Rand Merchant Bank (RMB) says that the holiday season proved to be very good for commodities, equities (six straight weeks of gains) and all risky assets, such as the rand.
The unit reached its best level in three years against the dollar, four years against the euro and nine years against the pound.
On a trade-weighted, inflation-adjusted basis, it hit its best level since 1997 and on RMB’s assessment reached its most overvalued level in decades.
“Despite this, we saw little Reserve Bank involvement – we estimate that they picked up only $500m in December, mostly for the government’s account. Nevertheless, we surely must be close to the danger zone in terms of a more aggressive response; the market is toying with the idea that they’ll cut rates again and budget day offers the possibility of taxes on inflows or other extreme measures,” it said.
If RMB is right and the Reserve Bank only intervened to the tune of $500m in December, this was modest at a time of such intense rand strength.
But working out how much the Reserve Bank intervened is in itself an art that isn’t easily mastered.
Why such a puzzle?
That’s because the intervention takes place in three different ways: outright purchases of dollars in the market by the Reserve Bank; purchases by the government that are deposited in the Reserve Bank; and through forward dollar purchases by the Reserve Bank.
Each of these has its own set of technicalities.
However, the bottom line is that they each represent intervention in the market to depreciate the rand but can also rise or fall due to valuation factors.
The Reserve Bank doesn’t spell out how much intervention has taken place. It hates the use of the word “intervention” and prefers to talk of accumulation of foreign currency.
And, if RMB is right and only $500m in intervention took place, then it’s hardly intervention at all.
I want to make a plea to the Reserve Bank for more transparency: Why don’t you say outright what amount was involved in actions to depreciate the rand every month?
Why make it such a puzzle? We want to know: How much dollars and euros were bought in order to weaken the rand? The Reserve Bank should tell the market monthly, and not leave it up to economists to calculate.
Let’s assume the RMB assessment is right, and the Reserve Bank and government were very soft in their reaction to the stronger rand in December. Why the timidity?
The answer lies in what I said at the beginning: The rand has, on its own, weakened by about 20c/dollar this year as fears about the eurozone debt crisis sweep the globe.
It now seems clear that Portugal will be next to get an International Monetary Fund/European Union bailout, and then the attention will shift to Spain.
All of this is making for a weaker euro, which the rand tracks. At the time of writing the euro was around $1,30.
The situation for the euro would have been even worse, had it not been for a disappointing number of new jobs created in the US in December.
At 103 000, non-farm payrolls were a lot less than the expected 150 000. Though the unemployment rate dropped, this was overshadowed by the disappointment about the number of new jobs.
This restrained the dollar’s rise on forex markets.
The Reserve Bank didn’t intervene heavily in the market in December because it knew that the eurozone debt crisis still had to play itself out.
The debt crisis could even see the rand weakening against the euro, as demand for SA’s exports from the region would be lessened as a result of the crisis.
RMB says there are several risks for the rand. These include Chinese and emerging market growth given the need for rate tightening to combat inflation; scope for the dollar to rebound and flows to emerging markets to reverse if a strong US economy brings forward rate hikes; and the risk that the eurozone problems spiral out of control, with Spain dragged into it and contagion spreading.
Another negative for the rand is that large inflows of money into the capital market have turned into big outflows.
Foreign investors were net sellers of domestic assets during December, with net bond sales of R14.8bn far exceeding net equity purchases of R5bn.
In the fourth quarter of 2010, foreigners sold domestic bonds to the tune of R24bn – a massive reversal from the first three quarters of the year.
This means that the inflows that buoyed the rand in December were very short-term, hot money flows into the money market.
Against this background, Reserve Bank timidity in trying to depreciate the rand is easy to understand.
Even after weakening by about 20c/$ since the start of the year, the rand remains very strong.
Rand Merchant Bank (RMB) says that the holiday season proved to be very good for commodities, equities (six straight weeks of gains) and all risky assets, such as the rand.
The unit reached its best level in three years against the dollar, four years against the euro and nine years against the pound.
On a trade-weighted, inflation-adjusted basis, it hit its best level since 1997 and on RMB’s assessment reached its most overvalued level in decades.
“Despite this, we saw little Reserve Bank involvement – we estimate that they picked up only $500m in December, mostly for the government’s account. Nevertheless, we surely must be close to the danger zone in terms of a more aggressive response; the market is toying with the idea that they’ll cut rates again and budget day offers the possibility of taxes on inflows or other extreme measures,” it said.
If RMB is right and the Reserve Bank only intervened to the tune of $500m in December, this was modest at a time of such intense rand strength.
But working out how much the Reserve Bank intervened is in itself an art that isn’t easily mastered.
Why such a puzzle?
That’s because the intervention takes place in three different ways: outright purchases of dollars in the market by the Reserve Bank; purchases by the government that are deposited in the Reserve Bank; and through forward dollar purchases by the Reserve Bank.
Each of these has its own set of technicalities.
However, the bottom line is that they each represent intervention in the market to depreciate the rand but can also rise or fall due to valuation factors.
The Reserve Bank doesn’t spell out how much intervention has taken place. It hates the use of the word “intervention” and prefers to talk of accumulation of foreign currency.
And, if RMB is right and only $500m in intervention took place, then it’s hardly intervention at all.
I want to make a plea to the Reserve Bank for more transparency: Why don’t you say outright what amount was involved in actions to depreciate the rand every month?
Why make it such a puzzle? We want to know: How much dollars and euros were bought in order to weaken the rand? The Reserve Bank should tell the market monthly, and not leave it up to economists to calculate.
Let’s assume the RMB assessment is right, and the Reserve Bank and government were very soft in their reaction to the stronger rand in December. Why the timidity?
The answer lies in what I said at the beginning: The rand has, on its own, weakened by about 20c/dollar this year as fears about the eurozone debt crisis sweep the globe.
It now seems clear that Portugal will be next to get an International Monetary Fund/European Union bailout, and then the attention will shift to Spain.
All of this is making for a weaker euro, which the rand tracks. At the time of writing the euro was around $1,30.
The situation for the euro would have been even worse, had it not been for a disappointing number of new jobs created in the US in December.
At 103 000, non-farm payrolls were a lot less than the expected 150 000. Though the unemployment rate dropped, this was overshadowed by the disappointment about the number of new jobs.
This restrained the dollar’s rise on forex markets.
The Reserve Bank didn’t intervene heavily in the market in December because it knew that the eurozone debt crisis still had to play itself out.
The debt crisis could even see the rand weakening against the euro, as demand for SA’s exports from the region would be lessened as a result of the crisis.
RMB says there are several risks for the rand. These include Chinese and emerging market growth given the need for rate tightening to combat inflation; scope for the dollar to rebound and flows to emerging markets to reverse if a strong US economy brings forward rate hikes; and the risk that the eurozone problems spiral out of control, with Spain dragged into it and contagion spreading.
Another negative for the rand is that large inflows of money into the capital market have turned into big outflows.
Foreign investors were net sellers of domestic assets during December, with net bond sales of R14.8bn far exceeding net equity purchases of R5bn.
In the fourth quarter of 2010, foreigners sold domestic bonds to the tune of R24bn – a massive reversal from the first three quarters of the year.
This means that the inflows that buoyed the rand in December were very short-term, hot money flows into the money market.
Against this background, Reserve Bank timidity in trying to depreciate the rand is easy to understand.
