One trusts that the foreign currency traders operating in SA closed any long positions on the US dollar or short exposures to the rand before they took off for their Easter holiday weekend. Uncle Sam did not take time off and reported on US employment as usual early on Good Friday 8h30 (14h30 SA time), New York time.
There were clearly enough traders at their computers to react instantaneously to what was an unexpectedly weak increase in jobs added. Accordingly the dollar was marked down and the rand and other emerging market currencies were marked up.
Bloomberg reports that the USD/ZAR opened that day at R11.9747, reached a low of R11.669 and closed at R11.79. At the time of writing, the rand was trading at R11.7789, about 1.97% stronger than its levels late on Thursday 2 April 2015 (See below).
The fewer than expected US jobs added suggests a less robust US recovery and therefore reason for the Fed to want to raise its lending or borrowing rates later rather than sooner. Hence the dollar became less attractive and other currencies, including the rand, more attractive. The other thought doing the rounds is that the recently strong dollar (on a trade weighted basis it has strengthened more rapidly than ever before) is itself the cause of weaker US manufacturing and other data. More goods and services imported and less exported will slow down GDP growth in the US. It will also help to stimulate growth in those economies that gain market share at the expense of US producers. The rising tide in the US, with a 20% plus share of the global economy, must help to lift all boats, as it appears to be doing for Europe, according to more encouraging economic news flow there.
While it is the Fed convention to leave the foreign exchange value of the US dollar to its own devices, the strong dollar may be said to be doing the Fed’s job for it – that is doing what higher interest rates might be required to do – that is helping prevent any unsustainable growth in economic activity. What US rate of growth would be too rapid to be sustained is a matter of conjecture and judgment for the Fed. But given the absence of inflationary pressures, nor of any extra inflation priced into long bond yields (that have been falling sharply rather than rising, the inclination of the Fed will likely be to wait and see how the US recovery unfolds and not to do anything with interest rates, that might delay or restrain, a modest rather than an obviously robust recovery.
A weaker dollar and stronger rand represents better news for the hard pressed SA economy and its consumers. It takes pressure off SA inflation and therefore off SA interest rates and borrowing costs, especially those at the longer end of the yield curve that take their cue from global interest rate trends that have been falling.
It should be clear that the upward pressure on the prices facing consumers in SA has nothing to do with their spending or borrowing plans that remain highly subdued. All the recent pressure on prices facing consumers, that further take away from the willingness of households to spend or borrow more, has come from what may be correctly described as fiscal policy. Higher prices allowed for Eskom is an alternative to government borrowing on Eskom’s behalf to keep the lights on. The higher taxes on fuel, intended to cover the massive shortfall on the Road Accident Fund and on Sanral’s budget, is a convenient alternative to more government borrowing or other tax hikes made possible by the collapse in the oil price- itself in part a reflection of the strong dollar.
Tighter fiscal policy and the stronger rand should be welcomed by a central bank wanting to defend its inflation fighting credentials. But it should be clear that any move higher on interest rates in South Africa can only weaken private spending further without having any predictable influence on the value of the rand and/or inflation generally. The reality is that the inflation outcomes in SA are largely beyond the influence of interest rates and the Reserve Bank. The value of the rand will take its cue from the dollar and the Fed and prices in SA will take their direction from prices administered by the government- that is taxes by any other name.
The Reserve Bank therefore should take a lesson from the Fed itself. And that is to focus on the state of the domestic economy over which its interest rate settings have some influence. Furthermore, it should leave the exchange value of the rand to its own devices, with due regard to the influence the exchange rate may have on the domestic economy. A weaker rand, for reasons beyond the influence of fiscal or monetary policy in SA, weakens the domestic economy, and does not justify higher interest rates. If anything, it calls for lower rather than higher interest rates. And vice versa, should and when the rand strengthens for dollar reasons. When it is all about the dollar, the focus of monetary should be on the sustainability of domestic spending not on the exchange rate.