Rand in position to put on more altitude, says analyst
July 14, 2008
By Ethel Hazelhurst
Johannesburg - The rand, which was strangely resilient in recent weeks despite poor economic data and political uncertainty, could continue to surprise on the upside, according to George Glynos, the managing director of Econometrix Treasury Management.
Glynos said the traditional link between Wall Street and the trade-weighted rand fell away three weeks ago and, despite weakness in US equities, the local unit remained relatively stable. He predicted that it could strengthen to R7.30 to the dollar by early next year.
The currency closed on Friday at R7.69, much improved from recent weakness, which saw it touch R8.10 on June 12.
Glynos explained that Wall Street, the home of the New York Stock Exchange, was a barometer of risk aversion among global investors, and normally a poor performance correlated with weakness in emerging market currencies.
The Dow Jones industrial index, a benchmark measure of US equities' performance, closed on Friday at 11 100.54, down from more than 12 000 on June 12, having peaked at more than 14 000 last October.
Glynos is in the minority on the outlook for the currency: most economists have been predicting rand weakness as evidence of slowing economic growth mounts.
Chris Hart, an economist at Investment Solutions, said on Friday: "Rand strength is very temporary; the currency is likely to fall as low as R8.80 to the dollar later this year."
Nedbank Capital is also bearish on the local currency. It cited "the clouded local economic outlook, high current account deficit and tensions in Zimbabwe" as "likely to weigh on the rand in the medium to long term".
However, Glynos said the higher interest rate differential between South Africa and trading partner countries would support the local currency.
The US Federal Reserve's target Fed funds rate is 2 percent, while the South African Reserve Bank's official repo rate is 12 percent.
Glynos said that as global growth slowed, investors would move from "seeking growth to seeking yields". In other words, as companies' growth potential shrank, investors were placing money in interest-bearing financial securities or bank deposits, rather than equities.
He said a category of offshore investment described as "net other investment flows" amounted to R34.8 billion in the fourth quarter of last year and R30.7 billion in the first quarter of this year - as opposed to portfolio outflows of R6.1 billion and R20.6 billion in the two quarters, respectively.
He said this category, which includes non-resident rand deposits with South African banks, was "in part" made up of carry trade flows. The carry trade involves borrowing in low-interest currencies and investing in high-yielding currencies such as the rand.
Another possible reason for the rand's strength is the potential for corporate action between a local company and an offshore acquirer.
The obvious candidate is local cellphone network provider MTN, which is in negotiations with Indian telecoms company Reliance Communications.
However, a conclusion to the transaction still seems some way off. Glynos said he did not believe the prolonged negotiations could be lending much support to the rand.
Instead, he attached more importance to the interest rate differential.
Nedbank Capital identified "a rights issue by AngloGold Ashanti" as providing positive impetus for the rand.
On Friday more support for the currency came from the gold price, which hit a four-month high. The precious metal closed the day at $962.75 (R7 420) an ounce, $23.25 higher.
|
|
