This past month has not been a particularly good one for the rand. The rand lost about 7% against the Aussie dollar in May 2011 to date, while losing less about three per cent Vs the Brazilian real and the US dollar.
We have long watched the relationship between the rand and the Aussie dollar for signs of South African specific risks influencing the value of the rand rather than commodity prices that are common to both currencies. A combination of commodity price strength and rand weakness is a heady one for investors in Resource companies, quoted in rands, on the JSE.
However the current modest rand weakness would appear to have more to do with favourable Australian, rather than less favourable South African specifics. This view is supported by the better performance of the rand against the US dollar and the Brazilian currency.
The rand is more than a commodity currency. It is also very much an emerging market currency and actively traded as a proxy for other less liquid emerging market currencies. The beat to which the rand is moving this month has been day to day volatility on emerging equity markets. The rand has been getting weaker or stronger as emerging equity markets have been going down or up in a highly synchronised way. And the JSE remains a highly representative emerging equity market.
It would appear that it is very much emerging market business as usual in the market for rands. If we run a model that uses the EM equity market Index to explain the rand/US dollar exchange rate using daily data since January 2008, the rand is trading almost exactly as the model predicts.
In the large market for the rand, with daily turnover of about US$20bn making it about the tenth largest foreign exchange market, three quarters of the transactions reported to the SA Reserve Bank are conducted between third parties with no direct link to SA foreign trade or capital movements. They trade the rand because they can trade the rand to hedge emerging market exposures.
The notion that the SA Reserve Bank could intervene effectively in such a market to move the exchange value of the rand in some preferred direction would seem a false premise. The Reserve Bank can buy foreign currency in this market to add to its reserves, as it has been doing, but such interventions could not easily be seen as market moving. The value of the rand continues to be dominated by global forces, particularly those that influence the outlook for the global economy and so emerging equity and bond markets. South African specifics seem to have had little influence on the exchange value of the rand in recent years and we expect global forces to continue to dominate the rand exchange rates.
The rand began the year at R6.61 per US dollar. It lost about 10% of this value by early February 2011 and then reclaimed its beginning of the year value in late April 2011. It has by now lost about 4% of its January 2011 value against the US dollar this year, while the Aussie and the real are about three percent stronger than they were at the beginning of the year.
While the volatility in the market for rands this year may be regarded as moderate by its own standards, the still unusual volatility in the rand must remain of concern to the authorities in SA. Without rand stability, predicting inflation and interest rates more than six months ahead with any degree of accuracy or confidence, remains a near impossible task. The foundations for genuinely stabilising monetary policy and interest rate settings in the form of a stable and predictable rand have still to be laid.
To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View:
Daily View 27 May: The rand: Foundations still to be laid