Rand strengthens below R6,50/$

MONEYWEB, Ron Derby, 27 November 2003

The rand treaded below the R6,50 to the dollar mark on Wednesday.

The rand treaded below the R6,50 to the dollar mark on Wednesday, reaching R6,46 to the greenback and R10,96 to sterling. And by afternoon the rand was touching 6,40 to the dollar. But economists Tony Twine and Mandla Maleka have different takes on the rand’s surge to that of Nedcor’s futures trader Arthur Buchner.

Econometrix’s Tony Twine puts the SA currency’s positive gains down to the US dollar’s losses against the Euro. “The movement of recent times has been due to the fact that because of the dollar’s southward movements the euro was back above the $1,18 mark. That should have taken the rand below R6,50,” he said.

But Buchner had a totally different take on the currency breaking the R6,50 to the dollar mark. “R6,50 was the technical level and what normally happens is that the market moves to that level and breaks through it as soon as traders have completed most of their trades,” he said.

Buchner says that he would not be surprised if the rand were to hold at current levels and does not get any stronger. “There was no dollar weakness as a factor in the surge this morning, it was technical factors.”

Eskom’s Mandla Maleka view of the rand’s surge this morning was in line with Twine’s but he added that it was a result of exporters taking advantage of the rand by bringing in their foreign earnings. “Well, I suppose the rand’s movements were a combination of dollar weakness and exporters bringing in their foreign proceeds,” he said.

Absa economist, John Loots, in an interview on Classic Business last week put SA’s currency strength down to commodities. Twine, however says that he believes it is primarily being driven by the South African Reserve Bank’s (SARB) decision to stop draining foreign currencies out of the market.

“The general strength of the rand over the past nine months has been the fact that the Reserve Bank has stopped draining the market of foreign currency. Since mid-1998, the better part of $24-bn has been taken out of the normal trade account and capital account flows,” Twine said.

Twine said chances of the gold price reaching the $500 per ounce mark before year-end, were plausible. “It could reach $500 but breaking the $400 mark is the key level. Once it breaks through that level, it could move very quickly to the $500 mark,” he said.

Exporters, who rely on dollar-denominated earnings, have made calls for a stable currency, rather than the volatility in the currency that has derailed much of their forward planning. Twine says at current levels, it was not possible that the rand could stabilize.

“The currency cold only achieve stability if it were to reach the R8 to the dollar mark. If it is under that, it would be strong to stabilize, over the R8,50 mark, to weak to stabilize,” Twine argues.

Maleka sees stability in the SA currency being achieved once the US economy starts showing convincing and sustainable growth. “As soon as there is convincing growth in the US, and sustainable at that, we should see some stability in the currency,” he said.

Buchner said the consensus amongst traders was that the rand could reach R6, 20 mark by year-end. He himself leans towards the R6,70 mark, though. “Another factor is that all importers would have imported ahead of the Christmas period, which should have weakened the rand, which did not happen. That is why other traders called the R6,20 level by year-end,” he said.

By year-end Maleka said that the currency could reach the R6,20 – R6,50 levels to the dollar. Twine said that the currency could go well over R7 mark in the long term, but could easily strengthen in the short-term. “I am willing to bet that over next 12 months, the currency will weaken,” Twine said.

Posted in Market commentary

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