The South-African Rand:
From Strength to Strength?
Peter Zihlmann
The long-term picture
In 1987, one US-dollar bought two Rand. By 1996, it purchased four Rand, and by 2001, eight. At the end of 2001, one US-dollar equalled almost 14 Rand representing a staggering loss of 85% since 1987.
The accelerated devaluation which occurred during the years 2000 and 2001 was, of course, disconnected from economic reality, and the inevitable correction of these excesses was the consequence.
From the high of the US-dollar against the Rand, reached at 13.85 in December 2001, almost 50% has been surrendered and, as we clearly see, the exchange rate has fallen back into the long-term multi-year up-trend going back to 1987. This up-trend reflects a yearly devaluation of close to 8%, likely in line with South-African economic reality.
At present, it remains to be seen whether the Rand-strength will overshoot on the up-side. The medium-term picture may provide the answer.
The medium-term picture
If we take the long-term trend-line as a guide and assuming that the inflationary environment does not change dramatically, we can see where the fair-value of the Rand may be positioned against the US-dollar.
On the other hand, we can also see the excess of December 2001, when the Rand fell to 13.85, and whose subsequent correction which actually signaled an over-shooting to the other extreme. We know, nevertheless, that extremes will be corrected sooner or later, so the present extreme is not likely to hold for long.
In December 2001, we saw the Rand spike down from the level of 12 to 14 within one week. This, of course, may also now happen, as those who are shorting the Rand suddenly panic and square their positions.
For those able to take a longer-term view, we believe that shorting the Rand at this stage will prove a very profitable speculation.
The short-term picture
Short-term, the down-trend has been broken and since early this May, a change of fortunes (or misfortunes) can be observed.
The turn-around may be in its early stages as bullish sentiments do not turn bearish over night. Therefore, selling Rand is for the medium-term speculator and not for the “in-and-out”-guy.
When choosing to go long on one currency against another one, the best option is against a weak currency. For this very reason, it was ideal to buy Rand against US-dollars when the US-dollar began its plunge against most currencies.
When a currency is expected to weaken, it would most certainly be unadvisable to short against another weak currency, but aginst on which is expected to go up more than any other. For this reason, it may not be the best idea to short the Rand against US-dollar as the US-dollar still has the potential of weakening further.
One of the stronger currencies at present is the EUR, which many analysts now see moving toward the 1.25 level against the US-dollar, even though at 1.10 they believed that the EUR would correct down to 1.05.
We recommend shorting the Rand against EUR.
Time works in our favour while The Bureau of Economic Research's latest survey shows that all three categories of respondents - business, labor and analysts - expect wage inflation of 9% or higher in 2003. The average expected wage inflation for 2004 is 8,6%. This is worryingly high compared with the Reserve Bank's inflation target range of 3%-6% and explains why the Reserve Bank last week expressed particular concern about the risks to inflation of rising labour costs.
The following recommendations were valid at the time of writing, viz. at
and may no longer be relevant at the time of reading.
Peter Zihlmann
May 29, 2003
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