Currency expert Andre Cilliers on the red hot Rand – where to from here?

TreasuryOne’s Andre Cilliers shares his insight on why the rand is the second best emerging-market currency thus far in 2022. The rand’s rally has been surprising given expectations that the Federal Reserve will hike interest rates sooner than previously expected. Amid concerns of the new Omicron Covid-19 variant, commodities turned positive around mid-December resulting in stronger emerging market currencies, especially commodity exporters like South Africa. According to Cilliers, if commodities do well, the rand will always do better. Cilliers also discusses the adoption of Bitcoin as a form of global currency, only probable under the umbrella of regulated authorities.

Andre Cilliers on the driving factors behind the rand’s outperformance thus far in 2022

If we go back to our discussion two weeks ago, when the Federal Reserve came out with their news that they will taper further, increase interest rates faster, inflation was above 7%. I mentioned at that stage why the dollar reacted strangely and weakened rather than strengthened and the opposite for the rand. Rand strengthening, dollar weakening. The market has discounted that interest rates will increase. The market gets a little disappointed with the fact it’s not actually happening. I think what the market wants now is action. They want to see an interest rate increase. Until such time as that happens, this is the sort of behaviour we can expect of markets. I also said the rand could trade down to the 15-30 levels, 15-30 being quite a pivotal point. If it breaks that, it could move down quite a bit lower and very quickly, which is exactly what it did. So, I’m not too surprised with it.

On the performance of emerging markets relative to the dollar

In general, the emerging market currencies are doing better and if we look at the emerging market space over the last couple of months, that money was flowing from the emerging markets back into the US dollar. All the emerging markets benefited from inflows, both into their capital and into their equity markets over the last two, three weeks. So, we’re not on our own. We have done better than them, but we are a proxy currency; we always overreact to the one side or the other but all the emerging markets spaces did better in this period.

On whether commodities are drivers in the rand’s outperformance

That could be because we are, at the end of the day, still a commodity currency, the same as Australia. If commodities do well, the rand will always do better. A lot of people started speaking about a slump in the commodity space; I differed and said I didn’t think it would happen. It will not be in such a hell of a boom phase, but the demand will still be there as economies keep on growing after the pandemic. Again, I’m not surprised commodities are doing a little bit better.

On the adoption of Bitcoin as a form of global currency

Nothing will happen before that comes within a regulated territory by central banks, both central banks and tax authorities, etc. If it cannot come under the umbrella of those authorities and regulators, there is not a snowball’s chance in hell it’s going to become a commonly used currency for payment and receiving of goods. That is quite a long way off. Yes, it is possible it can happen but the regulation needs to happen first. That’s not six months or two years away, it’s a couple of years away. I don’t think it’s an immediate threat but once that happens, it will also take away the extreme volatility you see in Bitcoin as it gets more widely used. And if it comes within the regulators, a lot of hot money – which currently flows into that space – will disappear and find a way somewhere else and dramatically affect the value of the Bitcoin. That would lead to quite a decline in the price of Bitcoin if it were to happen. Whether a lot of people think the more widely it gets used, the higher the price would go … I have a completely different opinion. Hot money will fly and it will actually decline in value.

On what technical analysis mean and the technical performance of the rand/dollar price action in the coming weeks

Technical analysis is looking at graphs of the performance of the currency in the past. According to that, there are various methods and things that you get. There are moving averages; there are 25-day moving averages, 200-day moving averages. All that gets done on graphs and is looked at. There are certain patterns formed and behaviours of the currencies that are repeated. You get all sorts of patterns: head and shoulders, inverse head and shoulders, candlesticks and all sorts of things.

What my technical analysis is saying is, we are moving closer to the 15-30 today, which was a level that, when it broke it, it came down to the 15-10 level again. That 15-30 level becomes a level on the upside to look at. If we break it, we could very easily and quickly move back to the 15-45 levels. If it fails at the 15-30, we are likely to see it go back down to the 15-10, 15-15 levels in a fairly quick manner.

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