Where to for punch-drunk rand in 2014?

After pushing to new lows against the US dollar this week, the South African rand has shown a 5.5% drop in value since the start of the year, pegging it as one of the hardest-hit emerging market currencies in 2014 so far.

And economists are predicting a “volatile” year ahead.

The decline comes in the face of a massive sell off in emerging markets, lead by weak economic data from China, while political and social issues hinder the currency’s recovery.

According to Reuters, investors have been pulling money out of emerging market stocks in six of the last seven weeks, while the MSCI emerging market index – which tracks the performance of top emerging market nations – has lost close to 6% of its value since the start of 2014.

South Africa’s rand hit a fresh five-year low against the greenback on Monday as the currency came under sustained pressure amid a worldwide flight from emerging markets.

The rand softened to R11.25 against the dollar in morning trading on Monday (27 January), before regaining some of that lost ground late on.

ZAR versus USD 1 - 28 January 2014
ZAR versus USD 1 – 28 January 2014

Rand hit hard

The South African unit, often seen as a bellwether for emerging market currencies, has been under pressure since the US Federal Reserve announced that it would trim back stimulus spending.

“The rand has now fallen by 25% against the dollar since last May,” said Shilan Shah of Capital Economics.

And since the start of 2014, the rand has lost 5.54% in value.

While South Africa has been buffeted by the winds that has hit other emerging markets, domestic mining strikes and the country’s fiscal woes are starting to bite hard.

South Africa has been dubbed one of the “Fragile Five” emerging economies (including Turkey, Indonesia, India and Brazil) which are struggling under a large current account deficit.

“There is clearly a danger that the rand falls much further over the coming months,” said Shah.

Hey you, stop spending!

FNB chief economist Sizwe Nxedlana cautioned South Africans to stop living beyond their means.

“We are essentially living beyond our means. Domestic export is significantly higher than domestic production,” he said.

Chief economist at the Efficient Group, Dawie Roodt, said because South Africans consumed more than the country produced, South Africa often had to lend money.
“Now our neighbours are asking for their money back.”

Roodt said the rand was undervalued when one used the Big Mac index to determine its worth internationally.

The Big Mac index had been used since 1986 as a guide to the value of currencies.

Investec economist Annabel Bishop said the depreciation of the rand this year had not been as rapid or severe as last year in total.

“Quantitative easing tapering is likely significantly…priced in, and the rand should not weaken dramatically from this point on further FOMC announcements alone,” she said.

“Higher prices at the tills as a consequence of exogenous pressure such as rand weakness, or rising fuel or agricultural food prices [due to drought] do not necessarily imply that the consumer will absorb the rise in the cost of living.”

She warned that the debt levels of consumers were high while the private sector employment prospects were weak and real disposable income growth was slow.

Investment strategist at Citadel Asset Management, Maarten Ackerman, said the rand could depreciate even further but it did not seem like the currency was over-stretched compared to the period between 2001 and 2008.

He said the rand remained vulnerable because the appetite for emerging market assets could deteriorate.

“Given the uncomfortable current account deficit, it is difficult to see the currency appreciating significantly from current levels,” he said.

“Less foreign capital inflows coupled with the size of the current account deficit will keep the currency under pressure despite solid capital flows into South Africa over the past two years.”

South Africa’s current account deficit was the largest among emerging markets, said Ackerman.

Rand Merchant Bank currency strategist John Cairns said the depreciating rand was caused by loss of confidence in the emerging markets. He predicted a “volatile” year ahead.

“Global monetary conditions are expecting to be tightened,” he said.

Economists warned consumers to start budgeting and not to live above their means because the cost of imported goods would increase and ultimately cause inflation to increase.

Roodt said now was the time for consumers to plan because the depreciating rand could mean a rise in food and petrol prices.

Will they or wont they?

The precipitous fall of the currency possess another headache for the South African Reserve Bank, which meets today.

The bank, already facing unemployment running at 25% and weak growth, will have to weigh up whether a soft rand poses an additional risk for inflation.

“We expect the rand to remain at the mercy of emerging market sentiment over the coming week,” Absa Capital analysts wrote in a note, reported by Reuters.

“Hence, even if the Sarb is more hawkish than expected, local strike activity abates or we get another encouraging local trade balance print, the rand is likely to remain on the back foot if emerging market sentiment remains poor.”

Global currencies to the dollar

Currency Per dollar 1 January 2014
Per dollar 28 January 2014
% increase/decrease
Japanese Yen 105.28 102.74 -2.41%
Kenyan Shilling 86.2 85.8 -0.46%
British Pound 0.60 0.60 0.0%
Chinese Yuan 6.05 6.05 0.0%
Euro 0.73 0.73 0.0%
Swiss Franc 0.89 0.89 0.0%
*Indonesian Rupiah 12160 12181 0.17%
*Indian Rupee 61.83 62.64 1.31%
Australian Dollar 1.12 1.137 1.51%
Nigerian Naira 159.8 162.5 1.69%
*Brazilian Real 2.36 2.42 2.54%
Ghanain Cedi 2.35 2.45 4.25%
Russian Ruble 32.90 34.67 5.38%
*South African Rand 10.47 11.05 5.54%
*Turkish Lira 2.14 2.26 5.60%

*”Fragile Five” nations | Currencies as at 16h00 on 28 January

(With Sapa)

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Where to for punch-drunk rand in 2014?