Currency will remain strong, says analyst
November 3, 2009
By Ethel Hazelhurst
The rand would remain relatively strong, despite the government's concerns about its impact on manufacturing and job creation, Chris Freund, the portfolio manager of the Investec Balanced Fund, said at a presentation yesterday.
Because a strong rand made local exports more costly on local markets, the government has been under pressure to persuade the Reserve Bank to weaken the currency.
Freund said he did not expect the new Reserve Bank governor, Gill Marcus, to cut rates further - after 5 percentage points of cuts since December - "unless something totally unexpected happens".
"Not in my wildest dreams do I think the central bank will lower rates to weaken the currency. For one thing, they don't know if lower rates will weaken or strengthen the rand," said Freund.
The rand's response to rate movements is inconsistent. Higher rates attract the carry trade - investors who borrow in low-interest rate currencies and place money on deposit in South African banks to benefit from the relatively high interest rates.
But lower rates benefit equities and therefore attract foreign investors through the JSE.
So the impact of any move depends on the trade-off between the two factors - something that is difficult to predict.
Moreover, Freund said: "The rand is the flip side of the risk trade. When people want to take risk, the dollar weakens and the rand strengthens".
In view of the global economic recovery, he therefore expected the rand to trade at relatively strong levels. And he believed "the lagged effect of rand strength" would ensure inflation was "very well behaved". He expected domestic inflation to approach 5 percent by mid-2010 - within the Reserve Bank's 3 percent to 6 percent target range.
Inflation stood at 6.1 percent in September.
However, Freund described inflation at a global level as "the next big issue".
He said global inflation, which is very low and has recently run into negative levels, was likely to pick up quickly.
He expected China's inflation, which was minus 1.3 percent in September, to rise to 11.5 percent by next April.
India's inflation rate would rise from 0.7 percent last month to 9.2 percent by December next year.
In many countries, spare capacity would prove a buffer against inflation, he said. But he warned that spare capacity could be absorbed very quickly. Central banks which had cut their rates close to zero would move in two stages - first to normalise rates and then to raise them further to counter inflation pressures.
The US Federal Reserve will make a decision on its federal funds target rate tomorrow. The target rate is now between zero and 0.25 percent.
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