Brigid Taylor: Safe to now bet on the Rand – against the Euro, at least

Published on

Forex specialist Brigid Taylor was an appropriate guest in our market watching slot on CNBC Africa's Power Lunch today. Yesterday's surprise announcement from the European Central Bank hit the Euro hard. And as Brigid suggests, there is good reason to expect further short-term weakness, including against the SA currency. A couple years back in Davos, I spent an interesting hour as part of a group interview with ECB President Mario Draghi. He came across as highly civilised, measured and super intelligent. The urbane Italian will need all those qualities to keep a divergent Euroland on the same path as he tries to inject growth stimulants into a stagnant economy. – AH

ALEC HOGG: Very appropriately, we have our Forex expert, Brigid Taylor, the Director at Dreadnought Capital with us in the studio. I say 'appropriately' because the news has all been about the ECB Chairman, the Italian Mr. Mario Draghi.

BRIGID TAYLOR: Super Mario.

ALEC HOGG: Is he so super after yesterday?

BRIGID TAYLOR: Well, I don't know. Look, he certainly didn't get the support because he didn't manage to push the whole quantitative easing package through. He managed to cut rates. If you look at the deposit rates now in negative territory in the Euro Zone, that's quite significant.

ALEC HOGG: Go back a little. At this Jackson Hole meeting where the Central Bank governors come together, he said something kind of spontaneously, which got the world's media to believe that quantitative easing, which is an American thing was actually going to be introduced into Europe. There was quite a bit of speculation that that would occur but yesterday it didn't.

BRIGID TAYLOR: It didn't and the thing is that Ravi has never, really pushed quantitative easing. He's spoken about LTRO's, so the repurchasing of…

ALEC HOGG: LTRO's?

BRIGID TAYLOR: Long Term Repurchase Agreements. Those he's spoken about, he's spoken about lowering interest rates, and he's been very concerned about the inflation in the Euro Zone, specifically. They are aiming for two-percent, sitting at point-three, Alec, and that's very, very low levels. The economies are struggling. Yes, they've managed to pay back some of their debt; however they haven't managed to gain some form of momentum. What's he's obviously, trying to do is dissuade people from depositing money, increase borrowing, get people to spend money and, hopefully create some form of inflation.

ALEC HOGG: Didn't Japan try this?

BRIGID TAYLOR: They did but one of the different factors that they have in the Euro Zone, obviously is because of the 17 countries, but they've also got the German economy, which is well managed, well maintained, and one of the criticisms that's come out of Germany, consequent to the decision yesterday, is they are still concerned about asset bubbles. So this driving inflation can cause those asset bubbles, but inflation sitting at point-three percent, which is the worse of the two evils? Going for potential, down the line asset bubbles that you can contain by coming back in line, in terms of interest rates, we spoke about this, in terms of the U.S. as well. We said, potentially with all the quantitative easing, we're going to see these asset bubbles.

What that effectively created is a market that is starting to come back on line and, as we mentioned earlier, we'll see with nonfarm payrolls, printing about that 200K a week. It's really a good sign, and you're starting to see the lagging effect of the Euro economy and the decisions that they've made and the pro-active economy in the United States, and how those differing views are now starting to play out

ALEC HOGG: This conference that David Shapiro and I went to, in Omaha – the Value Conference – we had a gentleman from Century Asset Management called Van Den Berg, who was explaining in his mind, why this works. It will be lovely to hear your view on it. He said the Americans had a depression that was caused by deflation, so they're really, not that scared of inflation. They are scared of deflation.

BRIGID TAYLOR: Yes.

ALEC HOGG: The Europeans had hyperinflation, and particularly the Germans, who really call the shots there now, in the Weimar Republic, so they're scared of inflation.

BRIGID TAYLOR: Correct.

ALEC HOGG: So the Americans don't mind QE but Europeans, perhaps think deflation is a lesser evil. That was his take on it. What do you think?

BRIGID TAYLOR: Well, I think that that's the case. If we look at the United States, what they've consequently said and as I said earlier, is that even though they may be concerned about inflation down the line, yes, I think if they continued on this path, and if they continued to embark on the quantitative easing, with an unending scenario. Yes, of course you're going to have some form of hyperinflation. However, by pulling that back, so you've got some form of lever in the system that you can extend it for a period of time, until the market and the economy comes back on line, as we're starting to see in the United States. They're creating jobs. They are starting to see growth numbers picking up. They're starting to see the consumer back online. All of those things speak to growth and I think that the biggest concern in the market currently is, as much as it is deflation, what it really means is very, and very low growth levels.

How do you drive growth in a market that is being so severely hit? Is you've got to create opportunities for people to access cash, at relatively low levels. So it doesn't cost them to borrow money, so that they can then invest or buy goods or start business, etcetera.

ALEC HOGG: But now a normal citizen, who doesn't understand all these high economics and, certainly, foreign exchange, etcetera, is going to say, "How is it possible for anyone to deposit money if, in fact, they're going to lose it?" It's not an interest. It's a negative interest.

BRIGID TAYLOR: It's a negative interest, so what they are basically, saying is, 'you are going to pay them to park your money at a bank.'

ALEC HOGG: Why would banks do that?

BRIGID TAYLOR: What they're doing is they're saying, "Spend your money. Don't save your money. Spend your money." That's the message that the Central Bank is sending. "We don't want you to save. We want you to spend." The only way we're going to get this economy back up and running is by creating a vehicle that forces people to spend their money.

ALEC HOGG: So that's the message. How did the markets react?

BRIGID TAYLOR: So the markets, at the moment… I mean it was a huge shock to the system. I think that a lot of people were expecting it to be a dovish report. I don't think that they were expecting as aggressive a stance that he took, so we've seen the Euro come up dramatically, in fact we were talking about it on Currency Wars yesterday, the two big players we've been looking for, particularly in the Euro Zone, because of the weakness and because the Rand has remained relatively range bound. Is for the Euro Rand to see further strength, so that 14.05 level…

ALEC HOGG: So the Rand to appreciative against the Euro?

BRIGID TAYLOR: The Rand strengthening against the Euro rate, so basically the currency goes down, trading at 14.05, a great level to get in. It is currently trading 13.88 and there is potential for further downside because ultimately, what's going to happen is investors that are sitting or parking money in the Euro Zone, the interest rates are so low, there's no attraction, so that form of funding will look for alternatives. And one of those will be high-yielders, like ourselves.

ALEC HOGG: What about America, if you're playing in Dollars?

BRIGID TAYLOR: If you're playing in Dollars, look, the interest rates in the United States are expected to start seeing hikes towards the first half of 2015, that's where the market is pricing it, so we are starting to see interest rates pricing that in. Therefore, investors will look for what they deem as a safe-haven investment opportunity, at close to around two-and-a-half percent, in the U.S. Treasuries. However, if you're looking at the Euro Zone, those have dipped off dramatically, so you are kind of sub-one percent at the moment, which is a very, very poor investment.

ALEC HOGG: But as far as Rand, and importers and exporters are concerned, if at the beginning of this year, or in January, when it was R15.00 to the Euro, you had decided then that you wanted to, if you're an exporter, to close in and get your R15.00 for every Euro – well done. You are now sitting at below R14.00. If you go back over a three year period, it was recent; it was only three years ago, it was R10.00. Could it get back to that level?

BRIGID TAYLOR: Well, it's really been around the Rand and that's what's been the interesting scenario. Is because it's been, and we talk a lot about this on my show as well, is that it has been so shocking to see, or not shocking but unbelievable that the Rand has remained within those narrow bands. We've seen the Ukraine fallout. We've seen fallout in our manufacturing sector. We've seen fallout in our strike action, yet the Rand has remained between 50/80 and 10.50/10.80, and hasn't done anything, and that is a function of foreign investors literally parking money in South Africa, just because they're getting eight-percent on their carry. Which speaks to an, almost a denial of underlying fundamentals, however they are there and those are things that we've got to keep at the back of our mind. When we saw the banks being downgraded, we are a negative watch.

At some point the chickens will come home to roost and if we start to see interest rates hikes, out of United States, then some of that money will move out and what will the function be, around the market, relooking at management of current account deficits. Looking at unemployment, looking at growth, in a region where, generally growth is relatively high, so all the underlying.

ALEC HOGG: But isn't it also similar there? Maybe they are also having problems, I mean Europe has got issues.

BRIGID TAYLOR: Absolutely, they are, so we're kind of forgiven, at the moment, because growth in Europe and growth in the United States is almost benign. However, they are starting and if we look at the United States, starting to turn the corner. So in South Africa, our growth rates are a low, however we offer a great yield, so it attracts funds into South Africa. People aren't looking for the growth. They're looking for the yield carry.

ALEC HOGG: So the money will be parked here, watch out if something better happens in the U.S. or in Europe but for the moment…

BRIGID TAYLOR: It's quick money, Alec, and that's the yield. It's hot money coming in, looking for yield. Foreign direct investments, almost zero this year, just because of the fact that we don't have a growth outlook and that's where you'll see drivers for growth, will come in; in the form of foreign direct investments.

ALEC HOGG: But why do they come to South Africa? Aren't there other options in the world?

BRIGID TAYLOR: Well, there definitely are and that's the reason that we've started to see a slump in terms of our foreign direct investments, for a whole array of reasons. Those speaks to the fundamentals in South Africa. However, if you look at the currency, specifically and the short hot money, which we look at or in terms of the carrier trade, those are predominantly been driven by foreign investors coming in, looking for that carry. They can get out in a day or two, and they can move their assets to another jurisdiction that offers them better opportunities.

ALEC HOGG: So once again, be careful the turbulence could recur. For the moment, though, the Europeans seem to be in about as much trouble as they are likely to be.

BRIGID TAYLOR: And a Rand well behaved, so take advantage of a well-behaved Rand. If you're an importer, wait for better levels, especially if you're buying from the Euro Zone. Don't look to cover right now because of the fact that you've got such great downside because of the Euro Zone battling so much.

ALEC HOGG: If you're an exporter?

BRIGID TAYLOR: For an exporter, without a doubt, and we've been speaking about this for a while is, it has just turned a corner because of the strength of the Rand against the Euro, is you've got to look to cover your Euros.

ALEC HOGG: So it's lock in at…well you could have locked in at R14.00, now you've got to lock in at R13.80, but that's Rand/Euro. Just quickly to close off with, the Dollar, if you are exporting to the U.S.

BRIGID TAYLOR: Dollar/Rand is still range bound, Alec, so you're looking to sell out at about R10.75/R10.80. On the downside, you're looking at about R10.65.

ALEC HOGG: But it's done that the whole year.

BRIGID TAYLOR: It hasn't done anything so, for me, that's the range. As an importer wait for the bottom of the range, cover some of your Dollar exposure. As an exporter, look for that R75.00/R80.00 level.

ALEC HOGG: But three years ago, we were at seven.

BRIGID TAYLOR: Yip, we were indeed. In fact, we went down to six-fifty.

ALEC HOGG: Oh, well there's a way to go yet. We talk about the currency being the share price of a country and certainly the share price of South Africa, at the moment, isn't doing too badly because everybody else seems to be doing so poorly. But if you take a three year view, well not great stuff. Anyway, who knows what the future holds. That was Brigid Taylor, Director of Dreadnought Capital.

BizNews
www.biznews.com