South Africa is the only functional democracy that did not join the United Nations’ condemnation of Russia’s invasion of Ukraine. Bizarrely, its currency is also one of the few beneficiaries of the war. Despite a flight to quality elsewhere, the rand has strengthened against the euro and sterling since the first shots were fired almost two weeks ago. In this podcast, forex specialist TreasuryONE’s Andre Cilliers – currency risk strategist – explains why this is not as irrational as it first appears.
Andre Cilliers on how the Ukraine-Russian war has affected the rand
Two weeks ago, we understood the possibility of a Ukraine-Russian war but at that stage, everybody was hoping there would still be dialogue and it would not happen. It did happen. The value of the rand at that stage was trading at around the 15.15 level, but at the same time against the euro, it was trading around the 17.15 level. Since then, we need to mention what happened to the dollar because the euro against the dollar was trading at levels of 1.13. It now trades at 1.0840 which is a 4% weaker euro. At the same time, the rand strengthened against the euro by some 2.6% and only weakened against the dollar by about 1.5%, 1.6%. So, the rand has done exceptionally well over this period in the sense that it gained against some currencies, weakened against others. If you look at what happened to the ruble, for instance, the devaluation or the weakening of the ruble against the dollar is in the order of 80% over the last 12 days. Massive moves in the currency space, but also massive moves in the commodity space. Gold as we speak was just briefly over $2,000 an ounce again. Palladium and platinum, shooting out the lights. The palladium price from December to now is trading around 70% to 75% higher. That’s the junk in that space. Coal was briefly over $400. It might even be above that again today but over $400 a tonne last week from levels of $220, $230. This is all because of the energy crisis. There is a 40% move in the oil price over the last two weeks or so.
On the impact of Ukraine-Russian war on South Africa’s export earnings
It does export earnings a heck of a lot of good. One of the problems we might incur is getting the exports out and delivered to the other side? That is something that is still to be seen because if this war continues, it might have an impact on how to get goods from point A to point B. If this continues, the commodity boom we’re currently seeing might continue because the demand will be there. However, the logistics might not be there. But certainly, there will be some benefit to the fiscus on that front going forward. At this point, I’d rather not see the fiscus benefit from a windfall like that. I would rather see the war dissipate and unwind so we can get back to a more peaceful situation because this is certainly not good for world economies, especially Europe, if this continues.
On why the dollar has strengthened aggressively against the euro
At the end of the day, this is happening in Europe, and that’s exactly why the euro and also the pound are doing badly. It’s mostly a European war. If this escalates and continues, it will be fought out in Europe and their economies will be impacted more than anywhere else. Apart from that, if you look at the exposure of Europe to Russia, the whole sanction thing will impact dramatically more on Europe than on the rest. For instance, the debt of Russian banks, the bulk of it lies in the European banks. That is why Europe is suffering so badly.
On how the Ukraine-Russian war affects the pound sterling
Even though there is and was a Brexit, the European economy and the UK economy are still closely linked. The bulk of trade still takes place between the UK and Europe.
On the impact of world growth if the Ukraine-Russian war continues
If it continues for the next 10 to 12 days, the impact will be minimised; commodity prices will return to lower, more acceptable levels, the oil price will retreat to lower levels, and the crisis will be averted. If it goes on for weeks and months, this will paint a very different, negative picture for the world. In terms of what happens to world growth, it will have an extremely negative effect on global inflation rates and its knock-on impact on interest rates and the value of currencies. Moreover, we can expect certain food and oil shortages. Fuel prices could go much higher. That will lead to massive inflation on food. You will see an impact on our export side. We are a big exporter of fruit to Russia; from what I’ve read, 12% of our apples are exported to Russia. Industries worldwide will be impacted by sanctions and companies will suffer. Shortages will come in, leading to impacts on price, inflation and ultimately, interest rates. And that will affect world growth. An extended war would have a very negative impact and spell doom and gloom for consumers across the globe, especially in Europe.
Read also:
- TreasuryOne’s Andre Cilliers is bullish on the Rand – here’s why
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