Month: February 2014

Resource companies: The earnings tide has turned

The JSE All Share (ALSI) Index earnings per share are growing again. As the chart below shows, nominal earnings are now back at the record levels of 2012, while real earnings and earnings valued in US dollars (at current exchange rates), while increasing,still have some way to go to get back to their peak levels of 2007-08.

The level of JSE ALSI earnings has been assisted by a very strong recovery in the earnings reported by JSE listed Resource companies for the period ending 31 December 2013, off a low base. We show the cycle of JSE Resource Index earnings per share below. The annual growth in these resource earnings is highly variable.

Trailing earnings had declined by as much as 40% on a year before by mid 2013, before their recent recovery. They had previously recorded over 80% growth in their recovery from the global financial crisis. Reported JSE Resource earnings are now increasing and in positive growth territory compared to a year before. These growth rates are gathering momentum of their very low base, helped by the still weaker rand and (hopefully) less disruption of mining output by strike action.

It seems clear that the share market typically anticipates the earnings cycle to some degree. Share prices hold up better than earnings when earnings are falling and when earnings pick up again share prices lag behind. In other words, the earnings are expected to follow a consistent cycle of periods of above and below normal growth rates. They are expected to recover to something like normal when earnings are most depressed and the earnings cycle is at its trough and to fall away back to normal when growth rates have peaked.

A consistent pattern of prices anticipating earnings shows up in the price to earnings multiple attached to resource earnings. The multiple tends to rise in the downswings of the earnings cycle and in to decline in the upswings. We show below the PE ratio for the Resource Index. The PE multiple was at a low point in early 2009 after the post crisis peak in the earnings cycle. Thereafter the PE multiple rose rapidly, even as earnings continued to decline to a negative growth rate of minus 40% p.a. in mid 2010. Then, after the reported earnings had again assumed a strong upward trajectory (reaching a peak of 80% p.a. growth by mid 2011), the PE multiple fell away sharply to a trough in mid 2012. Then the PE multiple recovered strongly as Resource earnings again fell away, having fallen by over 40% by mid 2013. This PE multiple, after rising in 2013 as earnings fell away, has now fallen in early 2014, with the recent uptick in reported earnings.

The crisp question then for investors looking for good returns from Resource stocks is whether or not the growth in resource earnings will be fast enough to overcome a declining PE multiple attached to these reported earnings? As we show below, the severe decline in the PE multiple from its peak in early 2010 was accompanied by positive returns from the Resource sector for a further 12 months – the growth in earnings over this period compensated for the lower value attached by the share market to these reported earnings. Something like this may well happen again: as the PE multiple recedes back to something like normal, the improved earnings may help improve absolute share prices.

The key issue then is the outlook for resource earnings themselves over the next 12 months. Based on history Resource earnings do have a tendency to normalise as the share market appears to expect it to do. We provide below a measure of normalised or cyclically adjusted Resource Index earnings.

This is calculated using time series forecasts based on the previous ten years of monthly data that is rolled forward every month. Our cyclically adjusted earnings are a time series best fit. We suggest that this measure provides as good an approximation of trend or normalised earnings expected by investors as can be derived by statistics. Reported and normalised Resource Index earnings are represented in the figure below over the long run going back to 1980, using 10 years of data going back to 1970 to generate the first estimate for January 1980 and then rolling the forecast forward for each month thereafter by dropping a month and adding one. We also show the results of this exercise close up for the period 2008 and 2014.

Reported Resource Index earnings are currently well below the normalised measure. If earnings do in fact trend back to these normalised levels they still have a great deal of catch up to do. That is, from R2000 of reported earnings per Index share to R2800, a potential increase of 40%.

Such an increase would, as we have shown, not be out of line with past performance and would provide scope for good returns even if the PE multiple falls away. This growth in earnings however is by no means predetermined. It will be dependent on some known unknowns, such as the value of the rand over the next 12 months as well the ability of the mine managers to sustain or even increase output and to control costs.

 

The rand / US dollar exchange rate, were it to strengthen, would not necessarily be a threat to Resource valuations. If the rand strengthens it may reflect a growing appetite by global investors to take on emerging market and commodity market risk. They would do so if the outlook for global economic growth improves and therefore becomes more promising for emerging market exporters and the prices they are expected to realise for their metals and minerals.

A stronger rand may well be offset on the revenue line of mining companies by stronger commodity markets and higher US dollar prices.

The rand may also benefit from improved SA specifics, in particular a resolution of the strike threats and action on the mines that so damage exports from SA, without the mines having to accede to costly wage increases. It is not the rand hedge qualities of the SA mines that will determine their long term value to shareholders. It will be their ability to generate a flow of earnings, or better still a flow of US dollar earnings, that will be decisive in the long run. In other words, the mine managers through good fortune (strong growth in China) and excellent cost management may prove that they are able to send the underlying long term trend in normalised earnings in a strongly upward direction.

The gambling industry: No ordinary industry

The casino industry, and the established gambling industry in general, face threats from new sources.

Gambling is no ordinary industry. Nowhere can anyone with simply the will and the capital to do so offer an open opportunity to the public to play games of chance for money.

To enter the gambling business, investors typically have to cross very high barriers to entry set by regulation. They will need to acquire a special licence and, much harder perhaps, a prescribed suitable venue to play the games. They will also have to satisfy strict instructions as to what particular games of chance and prizes they can offer.

The reason why societies intervene in the gambling market has much to do with a religious, essentially paternalistic, objection to gambling, or rather perhaps a visceral objection to the sometimes large gambling losses that may be suffered by particular gamblers they know or have heard about. The best practical argument for tolerating and legalising gambling services is that what inevitably follows prohibition or the imposition of onerous taxes: illegal gambling, which is even worse for the community.

This argument applies also to how society can best manage all of what are broadly regarded as the popular “vices”. Driving consumption underground is not good public policy.

Furthermore, if enthusiastic gamblers are prevented from gambling near where they live they will travel to jurisdictions near and far to do so. The opportunity to tax the activity for useful local purposes – perhaps to reduce the burden of other taxes or to provide employment at home rather than elsewhere – may well win the political arguments for and against licensing gambling.

The opportunity to tax gambling activity as an alternative to imposing other taxes, may well win the political arguments for and against licensing gambling. The prospect of employment at nearby casinos or race tracks, rather than far away, will be an additional argument for local or provincial authorities to license gambling venues.

The history of casinos in SA

The history of the large entertainment casinos in SA with their banks of slot machines and a variety of table games that attract many players, provides a good case study of the practical and political forces at work when dispensations for gambling are imposed or relieved. Casinos were illegal in SA before the so called “homelands” were allowed to license them. The customers would travel from SA to gamble and for other pleasures or vices not legally available closer to home. The homeland authorities would tax these activities and relieve the SA taxpayer of some of their burdens. In SA, consequently, there had also grown up a large, illegal, unregulated and untaxed, local casino industry.

With the re-unification of a democratic SA and the demise of the homeland authorities, it was sensibly decided to legitimise the casino industry in SA, to place it under the authority of the respective provinces and most important, to strictly limit the number of casino licenses nationally and by the province. Only up to forty casino licences in all could be issued and provinces were able to license their operation within the urban areas close to their potential customers. The distant, previously homeland casinos, while they retained their licenses, lost their competitiveness. Why travel further than to a convenient casino close to home?

The success of these newly established SA urban casinos in attracting custom soon became apparent. Their success in attracting a larger share of the household budgets for gambling became immediately and painfully obvious to the horse racing clubs and their dependents on the tracks and farms. Horse racing had benefitted from something close to a legal gambling monopoly in SA. The revenues from gambling on horses, shared with the private bookmakers and with the provinces as taxes, had helped support a thriving, labour intensive, industry. Horses are not easily groomed by robots. Casinos too provide employment and income earning opportunities for local business to supply their needs.

But the gains of the owners, workers, suppliers and the players at the new SA casinos, at the expense, in part, of the racing clubs and their extended network, help illustrate an important point.

The different gambling offers compete with each other for a fairly predictable share of domestic household disposable incomes, in SA equivalent to between one and one and a half per cent of disposable income on average, though the share does vary by province and by city. The demand for gambling services can also be shown to depend in part on the disposable incomes of households and also on the traveling time taken to access gambling venues. Both the poor and the rich tend to spend a lower than average proportion of their incomes on gambling than the middle income earners.

The role played by the archetypal foreign travelling high roller in the typical casino, outside of the special cases of Las Vegas and more lately Macau (casinos are still illegal in mainland China), has been shown to be minimally important to the large urban casino in South Africa and elsewhere. The SA casino business caters to a local customer base. Online gambling opportunities may be about to change all this – if allowed to do so.

But while the casinos compete with each other and with the tote, the lottery and the private bookmakers, the limits to entry have proved valuable to the licensed casino operators.

For these reasons, a partial casino monopoly in one urban area can prove so valuable – and something the operators are prepared to pay for (in cash or kind).

A turn around the Cape

On this basis the Western Cape Government in the late 1990s was persuaded to grant an exclusive 10 year right to operate only one casino within the Cape Town metropolitan region (as well as on the basis of a more decentralised economic development that would come with allocating a limited number of new licenses outside of the city).

The exclusive license was then determined by way of a competition, a beauty contest between different potential operators who were asked to compete for the licence by offering a variety of additional benefits to the province as well as the new casino itself in exchange for this exclusivity. Sun International and its partners won a closely contested bidding process with an offer of a themed casino in Goodwood plus other benefits to the province of a major financial and organisational contribution to help found the Cape Town International Convention Centre.

This exclusivity agreement has run its course and the province could exercise a further opportunity to extend the exclusivity agreement for upfront benefits in cash and kind in the broad public interest. Sun International, with a well established and well preserved casino complex in operation, would be in an especially strong position to compete financially for a new exclusive license and to offer significant benefits to the province and its citizens for a renewed exclusivity agreement.

Unlike its potential competitors it would largely save the cost of building a new casino. Yet judging by recent public commentary or rather the absence of it, the province seems inclined to forgo these potential benefits and seems inclined to allow the transfer of one of the rural casino licenses to the city.

The people of the province, as far as I am aware, have not been widely consulted on or informed about such a choice – of two casinos or one (with all the upfront payments in cash and kind that might be offered for continued exclusivity). It is a choice deserving of very serious consideration by the citizens of the Province and its elected representatives.

The upshot of any decision to permit two casinos would be likely to divide the market roughly between the two operators as well as to reduce the market for casino-like services in one of the rural areas, with the indirect knock-on effects on local employees and suppliers the loss of casino business would bring. Unless the total casino market in the Western Cape would grow significantly in response to an additional casino offering in Cape Town (an unlikely outcome) there would not be meaningfully more tax revenues for the province to collect nor any additional employment or ongoing economic activity. The rural area losing its casino would suffer obvious economic losses. The established Cape Town operator might well offer, in its bid for renewed exclusivity, additional benefits to the city or province in exchange for an extension of exclusivity.

Any additional hotel or entertainment facilities that might accompany any additional casino cannot be regarded as among the additional benefits provided by a new urban casino in Cape Town. There is no shortage of hotels, restaurants or entertainment amenities in Cape Town. Such additional entertainment facilities would very likely displace activity in restaurants and entertainment venues generally.

New threats

There is however a more serious threat to legitimate gambling interests in SA. It comes in the form of still more competition for the gambling rand from the proliferation of limited payout slot machines and electronic bingo terminals (EBTs) that are slot machines in practice. The latter offer an additional competitive advantage to the gambler in that they can promise effectively unlimited pay outs, unlike the limited payout slot machines previously licensed. Limiting pay outs restricts the competition of conventional casino-based slot machines for gambling revenue with casinos, the tote and the National Lottery. Unlimited, or less limited payouts, have an attraction to many casino or horse racing gamblers whose objective is the big win, even when the odds of doing so are very long shots.

The slot machines, masquerading as bingo machines, overcome this disadvantage of limited pay outs and may well become increasingly ubiquitous and competitive against the established providers.

A still bigger threat to established gambling enterprises is surely the online gambling opportunities that modern technology makes available. The cost of providing a gambling opportunity on the internet or participating in one, from home anywhere in the world, is close to zero. The offering therefore is infinitely scalable. By comparison running a casino or a racing club is a very costly enterprise because they employ people and require a physical structure and presence.

Lower costs of production of any good or service usually means lower prices as firms compete for a larger market share with better terms – and in the case of gambling this might well mean better terms or bigger potential prizes for the serious gambler.

This provides online gambling with a great competitive advantage over conventional gambling providers. The online sites that can attract many customers from all over the world, at very low cost, are likely to offer the better odds or the most commanding big payouts – especially if internet gambling pays very little tax!

The value of any casino or racing club is therefore under threat of the potential proliferation of EBTs and legal access to internet gambling. The threat from new technology and the great uncertainty about what the gambling landscape in SA will look like over the foreseeable future is currently influencing the value attached to Casinos and their licenses in SA. Therefore the case for establishing an additional casino in Cape Town, or the price the established casino might pay to keep it out, must now be subject to unusual uncertainty.

It is in the interests of the wider community that as much certainty as possible about the gambling landscape be created. The objective should be to maximise as far as possible the domestic SA public interest in the gambling industry for taxpayers, employers or employees and investors in addition to those of gamblers themselves. The possible migration to a highly competitive SA gambling industry dominated by offshore providers, with the interest of the serious gambler in effect treated as paramount, should surely not be allowed to happen by default, but only rather after careful consideration of its full economic and social consequences .

Monetary policy: The limits to inflation targeting

Is SA monetary policy accommodative? It all depends on whose inflation and whose interest rates you have in mind

We are told by the Reserve Bank that monetary policy in SA is “accommodative” because interest rates are below the rate of inflation. That is because real interest rates are negative. But whose interest rates and whose inflation rates can the Reserve Bank be referring to? From the perspective of lenders the interest paid on savings accounts in the banks are not keeping up with inflation – and more so if tax has to be paid on interest income. Low real interest rates are tough on savers, but, for a good reason, borrowers may be unable to pay any more for the use of their savings.

But from the perspective of business borrowers, especially small businesses still able to borrow from their banks at prime plus something over 9%, finance may in reality be very expensive. The presumption of negative real interest rates is that businesses will be able to increase the prices they charge their customers at more than the 9% per annum they pay in interest. If this were the case, simply financing a warehouse of non-perishable goods that increase in value by more than the costs of finance (after taxes) becomes a no-brainer of a profitable business decision. This would presumably make monetary policy accommodative and encourage business.

But is this currently the case for many businesses serving the domestic market? Do they currently have the power to price their goods or services ahead of the rate of inflation that was 5.4% in December 2013?

The weakened state of demand for goods and services may prevent this as the more detailed inflation statistics bear out. The headline inflation rate is the weighted average of the prices of goods and services consumed by the mythical average SA household, some of which have risen by much more than the average and others by much less. It is administered prices, those charged by municipalities for water and electricity etc and those subject to additional excise duties, for example alcoholic beverages (up 7.2% on average with beer up 9.2% on December a year before), that have been making the inflation running . Administered prices were up nearly 8% on a year before in December 2013.

By contrast, the price of clothing and footwear is estimated to have increased by a mere 3.6% and 3% respectively. The food basket itself was also only 3% up, believe it or not. The farmers, food retailers and manufacturers will know all about their pricing power and the pressure on their sales volumes and profit margins.

It is clear that rising prices in SA have very little to do with any strong demands being registered by consumers. As is well recognized, SA households are under increasing budget pressures from higher prices and taxes imposed upon them. And, most relevant, they are suffering from a lack of pricing power in the most important market for their services, in the market for their labour services.

By recent accounts from Adcorp the rate of dismissal from private sector jobs is accelerating and workers are much less mobile than usual. They are therefore presumably somewhat fearfully holding onto the jobs they have, rather than moving to better paid ones. This is not an environment likely to encourage growth in spending, despite interest rates in the money market being below the headline inflation rate.

In fact monetary policy is doing very little to encourage domestic spending and, indeed, with the recent increase in benchmark short rates, has become less so. Even less demand side pressure on spending can be expected as prices continue to rise, driven especially by a weaker rand over which domestic interest rates have little or no influence.

The fact that the SA economy is as weak as it is, indicates quite clearly that interest rates should have been significantly lower than they have been, and that they should be falling, rather than rising, given the deteriorating state of the economy. Furthermore, targeting inflation when prices are rising for supply side (exchange rate shocks, drought and taxes) rather than demand side reasons makes little economic sense. Inflation targeting in SA can only makes good sense when the exchange rate itself responds predictably to interests rate settings. The rand over much of the past 12 years or so has not behaved anything like this.

Aiming for low inflation is good monetary policy. Trying to meet inflation targets is proving again to mean very poor monetary policy in S.A.

The Hard Number Index: Foot off the accelerator

Hard numbers for January 2014 in the form of vehicle sales and notes in circulation are now available. We combine them to form our Hard Number Index (HNI) – a useful indicator of the state of the SA economy because it is so up to date.

The indication from the HNI is that while the economy is maintaining its forward momentum (numbers above 100 indicate growth) the pace of growth is slowing down and is forecast to slow further in the months ahead. This lower absolute number for the HNI in January 2014 is the first decline in the HNI registered since the economy escaped from the recession of 2008-09, when the HNI as may be seen turned briefly below the 100 level.

The turning points in the HNI anticipate those of the Reserve Bank Coinciding Business Cycle Indicator consistently well, as we also show. However this business cycle indicator has only been updated to October 2013 which is a long time ago in the business of economic analysis and forecasting. It will not come as much of a surprise to observers that the pace of domestic spending in SA slowed down in January. Higher short term interest rates imposed by the Reserve Bank in late January 2014 will do nothing to encourage spending growth that at best was stalling in the final quarter of 2013.

 

It was the slowdown in the growth in the supply and demand for cash (adjusted for inflation) in January 2014 that dragged the HNI lower. The real money base growth cycle peaked in 2011 and has been on a more or less consistently lower trajectory since then. The forecast is for a further decline in this growth rate.

 

By contrast, unit vehicle sales in January 2014 held up well. On a seasonally adjusted basis unit sales in January 2014 were about 1000 units higher than in December 2013, that in turn, on a seasonally adjusted basis, were well up on November 2013 sales.

For the motor dealers, December and January are both usually below average months for selling new vehicles. The current level of sales would translate into an annual rate of sales of about 650 000 units this time next year, which would be little changed from the pace of sales in 2013. However some preemptive buying ahead of exchange rate forced increases in list prices may well have provided a temporary boost to new unit sales in December and January. A combination of a weaker rand and higher financing costs does not bode well for the new vehicle market in SA.

For motor and component manufacturers, the profit opportunity must be in export markets where prices are set presumably in foreign currencies – trade unions permitting. The opportunity for SA to lift growth rates from the currently unsatisfactory pace, must lie with increases in export volumes. The weak real rand/US dollar rate, currently about 17% below its purchasing power equivalent value compared to its 1995 value, offers the opportunity for SA producers to take full advantage of higher operating profit margins to increase export volumes and rand revenues significantly. It is up to SA management and workers to seize the opportunity to share in the operating surpluses that a weak real rand makes possible.

Rand and bond markets: Some very welcome relief from the global bond market

Emerging market (EM) stocks and bonds had suffered and developed market equities had flourished, since long term interest rates in the US began their ascent in May 2013, when the US Fed first signaled its intention to taper its support of the US bond market and reduce its injections of cash into the system.

 

The rand, in company with many other EM currencies took its cue – as it usually does – from the capital flows into and out of EM equities and bonds. The New Year brought no relief for EM markets and currencies, regardless of the direction of US long rates, that turned generally lower in 2014.

That is until last week, when EM markets and currencies ended the week on a stronger note. The key to this improvement was a narrowing spread between US and EM local currency bond yields, as exemplified by the performance of SA government bonds last week. The spread narrowed and the rand and the JSE, in US dollar terms, benefitted – as did other EM equities.

We may hope that this relief for EM markets is more than a straw in the wind and that the now significantly lower EM bond and equity prices have renewed appeal for global fund managers. Any sustained strength in EM currencies will help restrain EM central banks (including the SARB) from raising short term interest rates. The SA-US yield spread will deserve particularly close watching in the days and months ahead.

Monetary policy: The Aussies win the exchange rate toss – again

The Monetary Policy Committee (MPC) of the SARB met on Tuesday 28 January with the rand down about 30% against the US dollar on a year before. Predictably, given the openness of the SA economy to exports and imports, the SA inflation rate had picked up and was forecast to exceed its inflation target range of 3- 6% later in 2014.

The next day the MPC decided to raise its key repo rate by 50bp from 5% to 5.5%. The rand in response weakened further, by about 3% by the close of trading on the Wednesday 29 January.

The Reserve Bank of Australia (RBA) decided on 3 February to leave its cash rate unchanged at 2.5%. The Aussie dollar (which had also lost a significant amount over the last year, approximately 17% against the US dollar) responded favourably to the decision, gaining about 1.6% against the US dollar on the day.

 

These market reactions help prove a point we have made repeatedly: higher interest rates may not necessarily support a currency; thus leaving interest rates alone, or even reducing them, may support a currency, especially in times of exchange rate volatility.

 

Higher short term interest rates may imply a deteriorating growth outlook, meaning lower rather than higher expected returns on flows of risk capital to and from an economy. As a result, the net outflows of foreign exchange may exceed the inflows, leading to a weaker domestic currency and more rather than less subsequent pressure on consumer and producer prices. Lower or unchanged interest rates, by contrast, may improve the economic outlook and prospective returns and attract more rather than less net foreign capital. It is growth prospects rather than nominal interest rates that drive capital flows to businesses and economies.

 

Australian cricket prowess may wax and wane. But Australian monetary policy has proved consistently adept at ignoring large movements in the Aussie dollar exchange rate, even welcoming the opportunity provided for more balanced growth. In the words of RBA governor, Glenn Stevens, from its media release of 4 February:

 

“The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.”

 

The picture presented of the Australian economy is not however without its challenges for policy. As shown by further extracts from the media release, there are threats to Australian growth, employment and prices – enough to keep interest rates at their currently low accommodative level in expectation of an improving outlook over the long term:

 

“In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have shown improvement. At the same time, with resources sector investment spending set to decline significantly, considerable structural change occurring and lingering uncertainty in some areas of the business community, near-term prospects for business investment remain subdued. The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably.

 

“Inflation in the December quarter was higher than expected. This may be explained in part by faster than anticipated pass-through of the lower exchange rate, though domestic prices also continued to rise at a solid pace, despite slower growth in labour costs. If domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time.

 

“Monetary policy remains accommodative. Interest rates are very low and savers continue to look for higher returns in response to low rates on safe instruments. Credit growth remains low overall but is picking up gradually for households. Dwelling prices have increased further over the past several months. The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.

 

“Looking ahead, the Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks. Beyond the short term, growth is expected to strengthen, helped by continued low interest rates and the lower exchange rate. Inflation is expected to be somewhat higher than forecast three months ago, but still consistent with the 2–3 per cent target over the next two years.”

 

By sad contrast the outlook for the SA economy has deteriorated, with no sign that domestic spending (linked inevitably to deteriorating conditions in the labour market) can lead the economy out of its doldrums. Still higher prices for goods with high import and export content will depress spending further and higher interest rates will further discourage very slow growing demands for and supplies of credit.  The remarks made by governor Stevens about the poor outlook for investment in the Australian resource sector are also not encouraging for the SA resource sector. The hope must be that the weak rand and the much improved operating margins in the export sector and for firms competing with imports can lead the economy onto a faster growth path –labour unions permitting.

 

The problem for the SA economy and its interest rate sensitive sectors is that not only did short term interest rates rise last week, but they were immediately expected to rise significantly further by as much as an extra 2% over the next few months by the money market.

Such increases would be most unwelcome to a hard pressed economy – even unthinkable had they been imposed last week. These higher interest rates would be unlikely to help the rand in the near future and the inflation outlook any more than they have helped to date, for the reasons we have indicated.

In our response to the MPC decision we cautioned against the danger of such an interest rate spiral heralded by the 50bp increase in the repo rate. We noted that a spirited defence of the case for not raising rates will be as imperative the next time the MPC meets, should the rand not have gained strength by then and the inflation outlook remains as unsatisfactory as it is now.

We noted further that without such an argument, the economy may well set off on a 1998 like spiral of higher interest rates in response to a weaker currency and the more inflation that follows that leads to still slower economic growth.

Monetary policy needs to be not only data dependent, but also accompanied by good and appropriate guidance for the market about monetary policy that makes good economic sense.

We are therefore much encouraged by the guidance offered by governor Gill Marcus this week when, in an interview with Reuters, she remarked: “Money market expectations of a 200 basis point rate increase this year were exaggerated.”

In response to these remarks, interest rates along the RSA yield curve moved lower and the rand has held up well against most currencies, excluding the Aussie dollar. This provides further evidence of how to manage exchange rate volatility the Australian wa