TreasuryOne’s Andre Cilliers on the Rand’s Santa rally
Currency expert Andre Cilliers gets up to speed with the drivers behind the rand's outperformance and predictions for the currency heading into 2022. South Africa believes it has passed the peak of a wave of coronavirus caused by the Omicron variant, a positive driver for the rand on global upbeat mood. According to Cilliers, it can look forward to enjoying stability on that end without massive declines and a mining sector that benefits from the current relatively high prices. – Sharidyn Rogers
Andre Cilliers on the drivers of the rand over the festive period:
During the festive period, we had an interesting time in the sense that markets were very thin; liquidity is always very thin in those periods. We had seen the rand weakening at one stage to well above the 16 level and we had a bit of a seesaw, especially in the beginning of the year when it came down to the 15.80 level, then it jumped back up against the 16 level. There were small factors linked to interest rates. Emerging markets as such pulled a little bit of a negative one. We've seen some of the emerging markets weakening but I want to ascribe that to nothing significant other than very thin liquidity, and very thin on the news side and even the slightest bit of movement being the gold price that went above 1800. We must not forget we had a gold price almost at $820 an ounce at one stage that retreated back down. There was a mixed bag but it throws it into low liquidity and you get these volatile swings. It is only really from today onwards that we have most of the players back in the markets. Liquidity will start coming back into the market and then we can really see where things want to go.
On predictions about interest rate hikes and the pace of the taper to benefit the dollar:
The dollar could benefit from that. If you look at the textbook economics, higher rates are positive for a currency and inflow of money into the country. That's the normal rhetoric regarding economics. So, it could benefit the dollar. However, the dollar has already benefited from this in the last couple of weeks – call it the last two, three months – because that was where inflation was when it persisted at the higher levels and where the Federal Reserve admitted inflation is not transitory anymore and that it's there to stay. During the last release of the unemployment figures, we also saw unemployment is a little lower and that there is still further pressure on the wage bill in the form of higher increases for people, which adds to inflation problem. So, if I say the dollar can benefit, I am of the opinion we've already seen the benefit and that it will not have a major impact going forward. I don't think we'll have a dollar going down to 1.10 or 1.11 against the euro. It will remain more or less at these levels, and we might very well see it's a bit of a buy-the-rumour, sell-the-fact situation that will come through.
On the volatility of Turkey:
What is happening in Turkey is kind of a mystery because the one day it's this and the next day, it's that. What they do have is a president who interferes with the independence of a central bank and fires people if they don't dance to his tunes. It doesn't really matter, then, what a central bank does. Whether they intervene to prop up the currency market or anything else will be in vain. They need to address the issue and this lies with the government and the independence that gets taken away from all other institutions. That's not likely to change and definitely not in the short term. So, the volatility from Turkey will remain with us for quite some time. We have to wait to see what happens during the next round of elections and that's not on the cards for the immediate future. Turkey and its conflicts will be with us. But what we are seeing is that Turkey has less of an impact on what happens in emerging markets and has decoupled and moving a little on its own. That will continue. For the short term, one can park Turkey on the side, unless something dramatic happens in terms of its government's stance with institutions, especially the central bank. That would definitely have a positive impact but as far as the negative is concerned, this will diminish a little bit in value as it has already decoupled from the emerging market space.
On how important strong commodity prices are to the local currency:
We are a commodity currency; we should never forget that. A very big part of our GDP still comes from the commodity side, from the mining sector, so we can never walk away and say commodity prices or the level of commodity prices are of no interest to us. When people speak of a total decline or sinking in of commodity prices, I have for a very long period maintained it will stabilise. The same increases will not be there for 2022. However, economies throughout this year will continue on their growth path. If you look at the situation regarding Omicron and its impact in Europe; the increase in infections, the lockdowns and the curfews were embarked on in the European zone. That will dwindle over the next two to three months and will put economies back onto the growth path. If you get economies onto the growth path and a return to normality, the demand will still be there for commodities. However, it will not be a commodity boom, it will stabilise commodities and keep prices at fairly stable levels and not on a massive decline. From a South African perspective, we can look forward to stability on that end without massive declines and a mining sector that benefits from the relatively high prices we are currently seeing.
On what a global equity market correction means for emerging market currencies, including the rand:
A global equity market correction will be negative for our equity market, it will be an outflow of money from the equity market. Whether it will lead to an outflow of money from the country is not something that will happen. Our central bank is still independent, still very much in front of the curve and we can expect interest rate increases, especially in the first half of this year; most probably two, at most three, increases that will keep us at the front end of the curve. As people move out of equity markets, they will move into fixed markets, fixed income markets, also in South Africa. I don't think a negative impact in terms of the currency is necessarily on the cards as it will be a shift and a change in portfolios of where you park your money.
On the technical performance of the rand heading into 2022:
We are sitting close to some significant technical levels as we speak. We're speaking about 15 and 16 if we significantly break the 15.60 and away from that psychological level. Then it's quite possible we could move down to the 15.50, 15.48 levels in a very short space of time. For now, I would call a little bit more strength down to the 15.40, most probably 15.30 levels. But from there, stablising at those levels and then gradually moving up back to the 16 levels. The significant one we have to look at now is the Budget Speech by our Minister of Finance, whose first Budget Speech will be done in February.
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