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Web Exclusive: Rand could strengthen to R7 to the US dollar
September 9, 2009
By Ethel Hazelhurst
The rand, which has firmed a quarter against the US dollar this year, is likely to strengthen further – boosted by a recovery in commodity prices and factors.
Brait economist Colen Garrow predicted the local currency would be close to R7 to the US dollar by the end of the year.
“As commodity prices rise, every single commodity currency is strengthening and the rand heads the list,” he said.
He calculated the rand had gained more than 26 percent in the year, followed by the Brazilian real 25.6 percent, the Australian dollar 22.3 percent, the New Zealand dollar 20 percent, the Norwegian krone 16.7 percent and the Canadian dollar 13.5 percent.
Gold has been trading at around the $1 000 an ounce level, up 5 percent in the month; and platinum is at around $1 288, also up about 5 percent in the month.
And other commodities are showing strength.
Ian Cruickshanks, head of strategic research at Nedbank Capital, also forecast a stronger rand – R7.20 within a few months.
Cruickshanks said: “The rand trades in ranges and, over the past few months, the range was R7.70 to R8.25. When it breaks below the base, the base tends to become the new ceiling.”
He said it was possible the gold price would also shift out of its recent range.
It has been trading between $700 and $1000 over the past few years and Cruickshanks said $1000 could become the new base.
“The run on gold can be seen as an index of anxiety in global financial markets.”
He pointed out a stronger rand will transform the outlook for inflation – and therefore for interest rates.
“That means we could see further cuts this year.” The Reserve Bank’s monetary policy committee (MPC), will meet later this month, to decide whether to cut its repo rate further from 7 percent.
The MPC has cut the repo rate by 5 percentage points since December.
Garrow’s rand forecast is based on purchasing power parity (PPP), which measures the rand cost of a basket of goods and services, compared with the cost of the same basket in another country, for instance the US.
According to this calculation the currency should be trading at around R7.16. But he cautioned it was a “theoretical valuation”.
In other words, unexpected events could produce a different outcome.
PPP rates differ from rates set in the currency market because they include the cost of certain services (eg rent) while currency market rates are set by the trade in goods and investment flows.
“PPPs are useful in determining whether a currency is either over- or under-valued,” Garrow said.
“Last year in November, when the rand traded at an average of R10.13 to the dollar, a PPP calculation showed it should be close to R7.”
Reasons for rand strength, he said, included the infusion of $2 billion in funding raised by National Treasury’s R2 billion and a $2.2 billion allocation from the International Monetary Fund, as it honoured a pledge at the London G20 summit to inject liquidity into the global economy.
Garrow said there had also been R55.6 billion worth of investment through the JSE and foreign direct investment prospects looked good, based on a number of pending deals.
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