Brigid Taylor unpacks Rand’s exchange rate woes

The Rand has been in a slump for two weeks, added to this is what feels like a never-ending platinum sector strike, a contracting economy, weak exports and the threat of downgrades, it all certainly makes for a gloomy South African environment. One that when assessing the barrier breaking JSE in contrast, is quite simply confusing. What are the markets telling us, and how do we begin to make sense of numbers that are not only intimidating, but also quite depressing? Giving us insights into South Africa's exchange rate and unpacking the crux of the situation, is Brigid Taylor, Director of Dreadnought Capital, who not only calls a spade, a spade, but makes it clear that action is required. – LF 

GUGULETHU MFUPHI:  Well the Rand is at a ten-week low and has investors wary of emerging markets following a string of economic data that painted a bleak growth outlook. Brigid Taylor, Director at Dreadnought Capital joins us now for more, to talk things all currencies related, this weaker rand, substantially weak against the US Dollar. I would have thought it might be driven by the local negative data as well that we received here at home.

BRIGID TAYLOR: I think it's been a two-way street, so we've been watching the Central Bank talk about…if we look at the U.S. with regards to what their outlook is with regards to quantitative easing, whether they are going to continue to support that with a ten billion pullback every month. That has largely been a function of their expectations around inflation and unemployment, so that hasn't really changed. We obviously have the nonfarm payroll data this week, so that will be quite interesting and I think the market is keeping an eye on that, purely just from the unemployment sector. If we look at the ECB however, the numbers that came out yesterday suggested that the Euro Zone is still struggling and I think a lot of sentiment around that is will Mr. Draghi continue to talk about easing or will they in fact, imply some form of easing and that's seen funds a little bit concerned about riskier assets. You've seen that across the board. You've seen commodity based emerging markets on the back foot. We saw the Aussie Dollar come off and then we saw our peers, the likes of Turkey, as well as the Australian Dollar also taking strain. However, the Rand has been the underperformer.

ALEC HOGG: It looks like it goes back to the old days of a one-way bet. I'm just looking at the three-year graph here, R6.50, three-years ago, to the US Dollar. Now we are approaching R11.00 again, to the US Dollar. You've got to be tempted, if you're in the international markets to, maybe just follow the trend.

BRIGID TAYLOR: Well I think that there are a couple of things. I think the Dollar is something that the market is watching. If we look at the U.S. Treasuries, the U.S. Treasuries have sold off a little bit. Emerging markets, as a whole, have come under a bit of pressure. However, as I mentioned earlier, with the Rand being the underperformer, largely as a function of a couple of issues. One – we've got very low growth and that was a concern that was raised last week with the GDP number coming out, specifically if we look at the manufacturing and that's a concern. In South Africa, with a weaker Rand, we should in fact be having the opportunity for exports and we are unable to do that, so that is a concern. In terms of the bigger picture, a longer term concern because, potentially, that will raise eyebrows around potential ratings downgrades, if we don't in fact manage to create some form of curbing of our current account deficit. We saw the trade numbers. The trade numbers also disappointed and showed us that the import sector still remains relatively strong, even with Rand at weaker levels. However, we are much shorter, in terms of our export sector and that is really the concern in South Africa.

ALEC HOGG: But it's a crazy situation because the Rand should be the share price of your country and yet, if you look at the share prices of the Stock Exchange, it goes in the opposite direction. Now, I'm sure there are people who are very confused about this.

BRIGID TAYLOR: Well if you look at the numbers over the last little while, Alec, specifically if you look into the equity market, we've seen a lot of offshore selling of our equity market. However, we have seen a continued support in the bond markets, particularly over the last week and I think that's been a function of the bond markets coming off or selling off, as a result of the weaker Rand offering better opportunities to engage again, specifically in the front-end of the curve. If you look at investors looking at our bond curve, specifically they are looking up to the 12-year area, potentially selling into the longer end. However, our auction was supported quite well yesterday, so from a foreign investor perspective I think that markets at the moment are very cautious, in terms of equity, because they're battling to see where we're going, to see sustainable growth in an environment where we've got such low growth levels. In South Africa, we've got a couple of fundamentals that don't necessarily pose upside opportunity for business, which we've discussed before. I think, going forward, you know, keeping it on the Rand…

ALEC HOGG: That is so nicely put, isn't it? Opportunities that don't pose upside, like strikes, I guess.

GUGULETHU MFUPHI: It's calling a spade a spade, and not a digging instrument.

GUGULETHU MFUPHI: Yes, that's true, but an interesting point that you touched on was the exports and so often, we always hear that a weaker Rand is best for our exports but as Alec mentioned, we see that evident in our vehicle sales as well. Does that also highlight the fact that fundamentally our economy is flawed?

BRIGID TAYLOR: Look, I think our economy… We've discussed this for a while. We've been on the front foot of potentially a global uncertainty around monetary easing and quantitative easing etcetera, so that's seen some funds and certainly seen the South African Rand, within a very clear range. We've seen a trade between basically 10.30 and 10.60 for the last couple of months. However, those underlying fundamentals are something we mustn't lose sight of and, without wanting to be a doomsayer, it is something that, in South Africa… If we look at other African economies, which we've chatted about on the show as well, is that there are significant headwinds, in terms of doing business in South Africa where there are opportunities elsewhere in Africa and we've even seen South African corporates embarking on these types of journeys. From a South African perspective, how do we engage better with business? How do we encourage opportunities for growth? How do we create opportunities or incentives for creating job creation, etcetera? These types of things need to be talked about, from a growth perspective, particularly in an environment where emerging markets are, starting to pull back and we are starting to see some form of growth, especially out of the likes of the U.S. That potentially will see those economies coming back on line at some point and hopefully South Africa is in a position, at that point, to maximise from a weaker currency, which unfortunately, at the moment, we're not.

ALEC HOGG: When you're in the middle of it, it's hard but if you step away, all the data is in the wrong direction at the moment, so I guess we've been talking a lot. Maybe it is time to start doing.

BRIGID TAYLOR: Well that's it, and I think let's talk about technical levels. As investors, if you're looking at the imports, at the moment the technical level on the Rand is around that 10.65, with a break above that now, it opens up that 10.80 level. That is quite significant, because if we do break above 10.80 it once again opens up 11. However, we may see this as a short-term issue, around the ECB decision, and ahead of payrolls.   Keep your eyes beady for the remainder of the week, in terms of deciding whether or not we have in fact, broken out of this range that we've been trading for a little while, before you get out your heavy guns and start firing.

ALEC HOGG: Yes, well if you look in the three-year view – and the channel is pretty well defined there – in some stages you might actually say that the Rand is certain to break above those technical levels and, then here we go, 11.

GUGULETHU MFUPHI:  Be optimistic Alec.

ALEC HOGG: No, if you just look at the graph, it looks quite clear but Brigid is talking to traders as well. In the longer term, we've got to do something a little bit more aggressive perhaps. That was Brigid Taylor, Director of Dreadnought Capital.