Global factors weakening the rand

FMCG SUPPLIER NEWS

IOL Business/ Sapa - Jun 13th, 08:27

Johannesburg - Global factors are the main contributors to the current volatility of the rand, analysts said on Wednesday. 

The rand reached its four-year low of R10.28 against the dollar on Tuesday, before recovering to R10 at midday on Wednesday.

However, the rand was not the only currency suffering volatility.

The Australian dollar and New Zealand dollar have also been under pressure.

Dawie Roodt, chief economist at Efficient Group, said the main reason for the volatility was changes in the US economy.

“The Americans indicated that their stimulus of their economy would gradually be reduced.”

He said to stimulate the economy, the US had printed a lot of money which was distributed over the world.

“Now they are saying that they are going to reduce this stimulus and the result of that is that money will flow out of the countries...”

Another factor on the rand was the slow-down in the economic growth of China, which imported South African commodities.

“Countries like South Africa and Australia are commodity-producing countries, and their currencies are taking a knock because they don't export so many commodities anymore,” Roodt said.

There were also domestic factors which added pressure on the rand's strength.

“Our economy is doing very badly. Secondly, we've got these long issues in the mines... nobody wants to invest in a country that is so unstable.”

Roodt said the disadvantages of a weaker currency outweighed the possible benefits.

“The most obvious disadvantage is that we are all poorer because of the rand’s weakness. Everything that is denominated in rands is worth less today than before the collapse of the currency.”

This included wages, shares, houses, pensions, and gold.

Roodt said some prices adjusted automatically and quickly to the fall in the rand, like share prices and the oil price. In most instances however it would take a long time for all prices to catch up to previous levels.

Wages and salaries were examples of prices that would take time to reach previous levels, he said.

“Oil prices, and eventually the price of petrol, will go up regardless if we buy more or less oil on the international markets,” he said.

John Cairns, currency strategist at the Rand Merchant Bank, echoed Roodt's sentiment and said the rand had experienced swings of between 20 to 30 cents a day.

“The rand is trading at exactly the same level as other emerging markets and its been driven by the US federal) reserve system and its impact on domestic bonds.”

Cairns said in the past few days South African bond yields came down substantially.

“We've seen foreigners selling our bonds very aggressively... We really need foreigners to come and start buying our bonds again. That is what will stabilise our bonds and currency market.”

Commodity prices affected the rand, but their effect was long-term.

“For the moment it is not having an impact on the short-term movement of the rand. That is all driven by the bonds and what is happening offshore,” said Cairns.

South Africa's domestic problems also affected the rand. Among these were strikes, worries bout the long-term economic future, poor gross domestic product, and concerns about possible credit rating downgrades.

“There is just a very negative sentiments towards South Africa, particularly from South Africans, and that is filtering through to international investors,” Cairns said.

“What all these local negatives are doing is adding to the pressure on the rand. But the main factor is really what is happening internationally.” - Sapa © Independent On-line 2013. All rights reserved.