The rand is up to its old tricks again…

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By Mike Schüssler*

The question I probably get asked the most as an economist is; “where will the rand be by Christmas or next year this time”.

Normally my answer is another question – why do you want to know? If you are going overseas for a holiday and want certainty, buy it now or if you want to bet a little buy half now and the other half later – I normally advise.

But, of course, investments are a little more complex and longer-term so let me not skirt the answer here.

The rand, in my opinion, will remain broadly at R14,5 to R16 to the dollar for the next few quarters and after that will likely again drop a little lower to a new range probably R15,50 to R17,50 or so for say 2023.

The reason for my estimate is mainly rooted in economic answers and the first two answers are really intertwined.

  1. The commodity cycle is still favourable to the rand – that is commodity prices are relatively higher than usual. The reason is partly at least the Federal Reserve Bank in the US which still has interest rates below inflation.
    • Also, however, is the fact that global supply chain disruptions and the war in Ukraine have helped increase the prices of many commodities. Russia is the 2nd biggest platinum group metals (PGM) exporter in the world and is being cut out, which should help SA. The same goes for coal and food prices.
    • However, some SA Imports such as oil and wheat will cost the country more. This will reduce the Current Account Surplus – but it should remain strongly positive.
  2. Apart from commodity prices increasing, SA’s agriculture and motor industries are also adding more to the export earnings which is also of course positive for the rand. This despite problems at the harbours and with rail. For example, SA exports about 25% less coal today than 3 years ago but earns three times as much as the price is up fourfold. But the functional delivery problems will haunt SA in the next few years when commodity prices reverse again.
  3. For the first time in 18 years SA has a lower inflation rate than the world average, the USA and other countries. This will be in place for a for more months at least. I expect a 2-quarter period ahead for this, which will also help the currency.
  4. SA Reserves have been building up and while the level is better than before it also provides a small buffer for the rand, or at least helps traders move on to other markets they think will cave in far more easily.

But if I look at 18 months ahead, then I believe the Federal Reserve will have increased the US interest rate to well above inflation and the USA will have seen slower growth but lower inflation again. This will play against higher commodity prices (except if war is still ongoing and Russian products are still banned and agricultural exports from Ukraine and Russia fail to reach markets).

Source: YCharts 29 April 2022

The other fact here is that SA inflation trends are higher due to a host of problems at state-owned entities and local governments. So, water, lights and taxes will still be increasing. This means the inflation advantage of 2022 will be out of the way.

But the biggest thing is that most fund managers and traders are very wary about SA politics and here we will see that if SA does not keep budget promises (unlikely) or cannot fix things like the harbours and rail (some will be fixed with private help but not all and it will cost importers and exporters).

The politics of the rand are highly toxic and unless there is a 180% turn in government attitude and ancient thinking then forget a long-term reversal.

Also, 2024 may see the ANC go below 50% but coalition governments do not normally make great reformers and that may have to wait another decade. The ancient left-wing policies which even ministers in private agree do not help anyone will remain.

We will still be seen as a highly unequal, unemployed and ungoverned (due to not much working from the courts to the power) country and that means the risk of being in rand for a long period is seen as negative. The reason why our long bonds have yields higher than many countries who have defaulted before says something about the risk premium.

So, when the rand is R15 to the dollar or below buy into other major currencies. Stay away from similar currencies like the rand such as the Turkish lira, Brazilian real or Russian rouble. Buy US dollar and some Euro etc. Maybe a side bet on some other currencies such as the Aussie dollar and Japanese yen.

Use strength to diversify out the rand so you do not have to panic when the sudden decline takes place.

  • Mike Schüssler is an award-winning, independent economist, founder, and owner of Economists.co.za and consulting economist for Brenthurst Wealth. www.bwm.co.za

Brenthurst Wealth

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