By Cees Bruggemans, Chief Economist FNB
The forces arraigned against the Rand are rather formidable and no collapsed corporate deals seem to matter too much. The Rand is rising and will rise.
Pushing the Rand higher are the major central banks at the global centre (New York, Frankfurt, Tokyo, Zurich, London), keeping interest rates near zero and encouraging outward liquidity leakage towards faster growing and still outperforming yield destinations in the global periphery.
Pulling the Rand higher are a smattering of central banks located in the global periphery as they start increasing their rates, led by the Bank of Israel two weeks ago, but last week followed by the Reserve Bank of Australia, with others expected to follow serially in coming months.
With their growth reviving, small output gaps, house prices and employment rising and industrial activity recovering, these central banks are uncomfortable with their too low interest rates imposed during the recent global financial crisis.
As some of these periphery central banks start their tightening cycle, the world gets the message that the rate gap between global centre and periphery is going to deepen, as much from the centre’s side by keeping rates at record lows as by the periphery side where rates in places are going to rise.
As with the weather when gradients between pressure systems steepen, the air flow from low to high pressure systems increases and becomes more violent. Mere winds can turn into hurricanes as air masses move faster.
As if such increasingly powerful pull-me-push-me forces aren’t enough, our September foreign reserve data released by the SARB last week hinted at an absence of forex intervention.
The increase in reserves to $39bn was all a matter of government foreign bond issuance, IMF special drawing rights and a higher gold price revising the value of SARB gold holdings upward. But no forex buying of any note.
So whatever the world wants to do to us, it is welcome doing so as there is no active defence. Understandably so, for the National Treasury is already fighting the recession with a budget deficit approaching 8% of GDP and will this year add R200bn to the national debt.
Under these trying circumstances, the Minister of Finance has no appetite to buy another $5-$10bn in forex in an attempt to stabilize the currency.
And if all that wasn’t enough, the world from time to time indulges in inventing fantasies. An old hoary one is that somehow the world will wean itself off American Dollar dependence (this is after decades of loving it and depending on it with a vengeance).
One standby is that some other currency will take over the leading reserve currency role, the Euro mentioned most in the West, the Yen most in the East (at least in places), with the Chinese Renminbi/Yuan being the global reserve currency of the future, with a few real diehards abhorring governments of all kinds and favouring the barbaric metal relic of old (gold).
The conspiracy du jour is a wicked mixture of all these things in some weird-looking basket, with oil Sheiks ready to start pricing oil that way, and whatever next.
It is all being denied, and it all looks most unlikely, but it is gist to the speculative mills.
Whatever the truth, it doesn’t matter. More capital is weaned away from Dollar safe havens and wings its way to alternative global destinations, in the process sinking the Dollar yet deeper and elevating the periphery currencies, including the Rand.
These four processes are now increasingly working in tandem, reinforcing each other, with as yet no end in sight this side of 2011 (or 2012).
It is downright scary, all these many machinations set in motion here, potentially a lot more powerful than the biggest precious metal boom you can remember. For global capital flows are so much more powerful than commodities.
The Asian peripheries, for instance, were severely plagued last week by appreciation pressures on their currencies in the wake of Dollar weakness. This encouraged forex intervention on their part.
This brings me to the fifth force supplementing the aforementioned four.
For in this world just described, gold (and platinum) tend to get re-rated as the Dollar goes down, with gold potentially reaping a fear premium, while in the case of platinum we should watch the global car industry (with China this year becoming the biggest global car producer with 12 million unit sales, and hundreds of millions of Chinese so far still unable to fulfill this dream).
Despite others producing more gold than us (but nobody else coming close in the platinum sector), South Africa continues to have this precious metal aura clinging to its collective brow.
With every Dollar that our gold and platinum prices increase, do the global speculative juices flow yet more freely regarding our small asset markets.
It all gets reflected in our Rand (and our JSE equity and bond prices) where upward spirals are no unfamiliar thing, having been a firm feature of our firmament these past 150 years.
It greatly complicates our monetary policy environment as both inflation and growth trends are deeply affected by these external financial pressures.
