The strength of the rand this month has been a case of US dollar weakness and emerging market and commodity currency strength. The rand continues to perform in line with the Brazilian real and the Australian dollar as we show below and as such has gained significantly this year against both the US dollar and the euro. The rand has gained 20% this year vs the US dollar and about 18% vs the euro. The dollar this week also lost some ground against the euro.
The exchange value of the ZAR; Jan 2009=100 (Lower numbers indicate strength)
Source: I-Net Bridge and Investec Private Client Securities
The US dollar vs the euro (Lower numbers indicate strength)
Source: I-Net Bridge and Investec Private Client Securities
The reasons for emerging currency strength is the growing risk tolerance that has accompanied the recovery of credit markets and the evidence that the fastest growing regions of the world are best represented in emerging equity markets. Capital has flowed out of safe havens into emerging equity markets. The JSE has continued to receive its share of these flows, adding strength to the rand and the JSE. The JSE ALSI when measured in US dollar has held its own against the bench market Emerging Market Index as we show below.
The JSE vs the MSCI EM 2009=100
Source: I-Net Bridge and Investec Private Client Securities
This comparable and very strong performance of the JSE in US dollar as well as in stronger emerging market (EM) currencies is despite the fact that the SA economy is lagging well behind its emerging economy peers. Yet it should be appreciated that the JSE – especially its large cap representatives are more exposed to the global economy than they are on the SA economy.
Ordinarily a strong rand would be very encouraging to domestic consumers. The prices of imported goods become ever more attractive in times of rand strength. Also inflation comes down and interest rates follow to further encourage consumption. This encouragement is not yet at all obvious. Also CPI inflation is lagging well behind import price inflation. Households remain reluctant to borrow and banks remain reluctant to lend.
Yet it should be appreciated that the fundamentals for a revival of consumer spending are improving. The strength of the stock market itself should help reverse some of the negative wealth effects on spending that accompanied the collapse in equity prices in 2008. And lower interest rates will help the housing market to stabilise and perhaps even recover. Equity in homes is another important source of wealth for SA households and any recovery in the value of homes to their owners will be helpful to balance sheets as well as confidence and willingness to borrow.
For exporters the strong rand takes away from the recovery in commodity prices and in export volumes. But they should appreciate the rand is strong because of a global recovery reflected in higher spot prices. For domestic manufacturers having to compete with imports, the strong rand means there is little consolation to be found. For them extreme discomfort follows these trends in diminished pricing power that add to the woes caused by still reluctant consumers.
The Reserve Bank continues to leave the rand to be determined by market forces and to stay out of the currency market. It also shows no appetite for quantitative easing to encourage the banks to lend more. The monetary policy committee however will have become more willing in current circumstances to further reduce short term interest rates. This is probably all the domestic producers of goods and services can hope for from monetary policy for now.
The recovery in the domestic economy will depend upon the strength of the global recovery and export led growth. Lower interest rates and improvements in household balance sheets, as well as more favourable prices in the stores, will help spending growth as will the continued buoyancy of government spending. The economy is closer to a recovery in domestic spending given the global trends and the stronger rand. Firms dependent on the SA economy have hunkered down – they have run down their inventories, reduced their borrowings and strengthened their balance sheets. They have probably experienced the worst the economy could throw at them. They should expect gradual improvement in the economic environment.