Cees Bruggemans: Will the Rand sink or swim?

By Cees Bruggemans

A momentous question: will the Rand shortly sink or swim?

The question comes in two parts:

Firstly, will the Rand sink against the Euro as markets start to believe that ECB President Draghi will succeed in inducing growth?

An interesting question. In other words, will the rumours of growth be strong enough to set in motion strong net capital European inflows, pulling the Euro along up with it, leaving the Rand behind?

Indeed, in the nature of these things, doing a Dollar on us (even doubling up on the ganging up of recent months of Dollar strength) as risk gets repriced even more, this time also from a reviving Euro side, and the poor Rand relatively sinking away?

I think, as with the reality of US QE bond buying, the present European QE liquidity effect sinks the Euro and drives long bond yields lower, keeping yield seeking in EM alive, and therefore relatively supports the Rand.

As with the Dollar, only when the end of Fed bond buying tapering came in sight last year, did the Dollar start its long upwards revaluation, also discounting the US interest rate hiking to come.

The ECB is only in the first month of QE bond buying, it will likely last through September 2016 (or longer) and any ECB tightening start may be delayed to 2018. That might delay the start of Euro firming to 2017, and it still weakening this year & even next year?

In which case the Rand as yet has nothing to fear from European growth strength, just as US growth strength from 2010 did as yet nothing to lift the Dollar, it remaining under pressure from Fed liquidity support actions in 2010 through 2013.

Alternatively, goes the question, will European travails in Russia & Eastern Europe weigh sufficiently on Europe for markets to stay growth-skeptic and thereby Euro bearish, with positive Rand inflows as Emerging Market (EM) yield-seeking remains supported?

My answer is that these propositions aren’t either/or. The ECB will remain liquidity supportive through 2016 at least, and Russia & borderlands will remain problematic as risk features, with sanctions eating away at European export growth, too.

The combination should stay supportive of yield-seeking EM flows, and prevent the Rand from starting a dive against a reviving Euro.

In other words, the Euro’s turn will come, as it has been the Dollar’s this past year and the coming year, but it is too early (by far) for the Euro to start its comeback (and for the Rand to sink without a trace against both $ & €).

Secondly, longer term, will stronger growth in the US and eventually also in Europe start to pull the Rand, along with other EM currencies, out of the doldrums? And when will this start?

Yes, in the long term that will happen, both the growth recoveries in the rich West and the commodity and risk improvement of EM prospects. Except I would paint China more centrally into this picture.

It might be coincidence, but by the time both the US and Europe are beating a stronger growth drum, Japan might perhaps also be there, with China having made its growth adjustment, with less downside thereafter, even as global commodity supply sides will have adjusted as well to more constrained demand prospects, and ready for some price firming.

I would say 2015-2016 is good for US timing, but 2017-2019 better for European & Japanese timing, with China straddling both, echoed by commodity plays.

That would point to a combined trough sometime in 2017-2018 after which very slowly anchors away as a new long commodity cycle gets underway, very very gradually of course.

That might see the Rand along with other EM commodity currencies start a new up-cycle, too, but initially only slowly, given the nature of global recuperation during this adjustment decade following so many financial, structural & existential crises?

Could the international credit rating agencies still skewer us & the Rand before us? Or let me rephrase that: could we still disappoint them, and at the crucial juncture (2017) invite a downgrade & Rand downside bias instead of a global-led revival?