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Why the rand should be R10.05/$ and won't be anytime soon

Oct 30 2015 15:16

Cape Town - The fair value for the rand would currently be R10.05/$ and R10.20/$ by the end of 2015, according to calculations by Arthur Kamp, investment economist at Sanlam Investments.

"Despite the fact that the rand is fundamentally undervalued, this does not mean that it will strengthen anytime soon. All we can say at this stage is that we believe the rand is undervalued against the dollar. A currency can, however, trade away from its fair value level for years on end," warned Kamp.  

He explained that anticipation of the hike in the US’s federal funds target rate and the steady decline in prices of SA commodity exports, as well as weak SA productivity performance, have gradually weakened the rand over the past few years.

READ: Rand benefits from dollar sell-off, stocks flat

Plotted against the Indian rupee, the Turkish lira, the Australian dollar and the New Zealand dollar, the rand has been the worst performer over the past 10 years.

That leads to the question: how much is the rand undervalued?

"We use a purchasing power parity estimate to calculate the fair value of the rand. We, therefore, work on the assumption the currency will depreciate in line with inflation differentials in the long run. Viewed in this way we believe the currency is undervalued," said Kamp.

"The rand is almost two standard deviations cheap against the dollar and almost one standard deviation cheap against the euro."

Seeing that the rand is currently undervalued, the Sanlam Investment Management (SIM) portfolios retain their underweight position with respect to their total offshore exposure, according to Kamp.

"In addition to this, instead of converting further dollar cash outright into rand cash, we implemented a currency hedging structure in applicable portfolios during the past quarter, so that the SIM portfolios benefit if the rand appreciates," he added.

ALSO READ: Rand slips as Fed hints of December rate hike

sanlam  |  sa economy  |  markets  |  currencies  |  rand
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