EDITORIAL: Increased rand volatility can’t be ruled out in a jumpy world
It is just as well that the Reserve Bank doesn’t target the exchange rate. But that doesn’t mean the wild swings of the past week would have gone unnoticed.
They show how quickly prospects can change and how vulnerable SA is in a world that is likely to get even more complicated as 2020 nears its end.
At the height of the Covid-19 induced volatility in April, the currency dropped to a new record above R19/$, which had some analysts calling for a quick break to R20/$. Subsequent events, most notably the US Federal Reserve dovish policy stance, conspired to take it in the opposite direction.
In the month leading up to the Bank’s latest policy decision on September 17, it gained more than 8% and approached R16/$, making it the best performer among emerging markets tracked by Bloomberg. That rise to its strongest levels since March had some seeing it gaining back to R15/$, levels not seen since February, before Covid-19 became the story of a lifetime.
One would normally have expected the Bank’s decision to pause its rate-cutting cycle to have been positive for the currency, boosting the appeal of holding SA assets that, due to the country’s dire fiscal position, offer some of the highest yields around, even for emerging markets.
Instead, in the four trading days since the Bank’s rates decision it dropped 4.5% to breach R17/$ for the first time in three weeks. It was by no means alone. Among 31 major currencies, only one has gained against the dollar in the past week, and that was a paltry move. The worst performers were the currencies of Mexico, Brazil and Norway, with declines of 6.9% to 5.2%.
The immediate driver seems to have been investors’ concerns that the Federal Reserve stimulus that they have got accustomed to might reach an end. Like Lesetja Kganyago here, the head of the US central bank Jerome Powell has been emphasising the limits to what monetary policy can achieve and the need for politicians to step up.
Unlike Kganyago, he wasn’t appealing for structural reform or the consolidation of runaway debt, but quite the opposite. Having cut rates to near zero and bought assets from government bonds and the riskiest company debt, he wants fiscal stimulus to take up the slack.
With US politics turning even more nasty and partisan before the November presidential elections, market optimism that this may indeed materialise is understandably short. President Donald Trump has suggested that he might not accept the result should he lose to Joe Biden.
Those used to the idea of the US as a source of stability in the global economy might get a shock in six weeks’ time, and the rand could be up for another roller-coaster ride.
The death of Supreme Court judge Ruth Bader Ginsburg has set off a fight over her replacement that will also complicate efforts at dealing with the economic issues at hand, just as the Covid-19 pandemic is picking up again and threatening to close down key economies in Europe and elsewhere.
Local news doesn’t look promising either. The perilous state of SA’s finances has been well recorded. Finance minister Tito Mboweni is due to present his medium-term budget policy statement in October and investors will be eager to hear how he plans to “close the mouth of the hippopotamus”.
Bloomberg reported this week that even officials at the Treasury are rightly concerned that plans to find funds — R10.5bn — for SAA will erode the credibility of SA’s fiscal policy and its pledge to rein in spending.
The rand is notoriously hard to predict, at least on a short-term basis, and the end of 2020 won’t be any different. This may have even swayed the Bank last week when it disappointed analysts who were expecting it to cut interest rates.
The repo rate is just 0.3% above inflation and lower than Bank forecasts for consumer-price increases into 2021. Further reducing the premium for holding the rand in these volatile times might have been asking for trouble.
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