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Friday, May 8, 2009

What is going to happen to the Rand?

I thought that this Bloomberg article may be of interest to everyone:

Rand’s Comeback Spurs Bets South Africa Is No Brazil (Update1)

May 5 (Bloomberg) -- No currency has performed better this year than South Africa’s rand, and a growing number of traders and strategists say the rally is about to reverse.

The rand appreciated 15 percent this year to 8.2621 per dollar, fueled by rising demand for higher-risk assets and export-driven currencies amid signs the global recession has bottomed. The South African currency even beat the Brazilian real, which offers higher money-market rates.

Traders are now stepping up bets that the country’s manufacturers won’t be able to withstand a stronger rand, which makes their goods more expensive to foreign buyers. Options show the rand has a greater potential to depreciate over the next six months than any other currency. Anglo Platinum Ltd., the Johannesburg-based producer of two-fifths of the world’s supply of the metal, said April 30 it cut about 5 percent of its workforce as production and prices fell.

“The rand at current levels looks too strong and overvalued,” said Flavia Cattan-Naslausky, a currency strategist with RBS Securities Inc. in Greenwich, Connecticut.
Traders are more bearish on the rand through October than any of the other 15 most-traded currencies versus the dollar tracked by Bloomberg, according to so-called risk-reversal rates.

Risk Reversals

The premium investors are willing to pay for six-month rand “put” options, which protect against currency depreciation, is 6.4 percentage points. That compares with 5.75 points for the Mexican peso, the country at the center of the swine flu epidemic, and 5.25 points for the Brazilian real.

The rand’s gains, which follow a 28 percent drop against the dollar in 2008, underscore a rally this year in export- driven currencies from the Chilean peso to the Indonesian rupiah that’s been stoked by optimism the worst of the global financial crisis is over. Finance ministers from the Group of Seven industrialized nations issued a statement on April 24 that said they see “signs of stabilization” in the world economy and that a recovery should begin to take hold later this year.
Such comments have boosted the appetite for higher-risk assets, such as emerging market currencies and stocks. Morgan Stanley’s MSCI World Index and the Standard & Poor’s 500 Index have soared almost 30 percent since their lows this year on March 9.
Risk Proxy

As one of the more widely traded emerging-market currencies, the rand is often viewed as a proxy for investors’ appetite for risk. The rand traded in tandem with the S&P 500 index 63 percent of the time in the past two years, compared with 55 percent for Brazil’s real and 51 percent for the Hungarian forint.

“The rand is the strongest evidence that the risk rally has been too quick,” said Beat Siegenthaler, chief strategist for emerging markets at TD Securities Ltd. in London. “It’s the one asset which has benefited the most without much fundamental reason.”

Foreign investors bought 25 billion rand of South African assets more than they sold this year, with most purchases being made in March, according to the nation’s stock and bond exchanges. South Africa’s FTSE/JSE Africa All Share Index has risen almost 16 percent since the end of February.

South Africa’s economy will shrink 0.3 percent in 2009, compared with 4.2 percent for Europe and 6.2 percent in Japan, the Washington-based International Monetary Fund said April 22.

“As long as risk appetite holds up, the rand could end the first half of this year stronger,” gaining to 7.50 per dollar by the end of June, said Carlin Doyle, an emerging-market currency strategist at State Street Global Markets in London. Doyle began advising clients on April 15 to bet that the rand may appreciate.

‘Hit us Hard’

Manufacturers in South Africa are not as sanguine. Exports account for about 28 percent of the nation’s $278 billion economy, figures from the South African Revenue Service show. Manufacturing, which makes up 16 percent of the economy, slumped a record 15 percent in February, according to Statistics South Africa. ArcelorMittal South Africa Ltd., Africa’s biggest steel producer, and Volkswagen AG have cut production.

“The strength of the rand is going to hit us hard because it compromises the competitiveness of our exports, which are already under pressure from the downturn in the global economy,” said Roger Pitot, executive director of the Johannesburg-based National Association of Automotive Component and Allied Manufacturers.
Naacam, whose members make 14 percent of the world’s catalytic converters, estimates the rand must weaken to 11 per dollar and 14 per euro to make South Africa’s vehicle-component exports “truly competitive,” Pitot said. The rand was at 11.0939 per euro today.

Morgan Stanley Bears

The currency may weaken to 10 per dollar as a “sharp fall” in revenue from commodity exports widens the trade deficit, Morgan Stanley analysts wrote in a note to clients dated April 30. “We maintain our bearish view on the rand.”

A 10 percent gain in the rand may shave 0.2 percentage points off gross domestic product if “sustained,” according to Andre Roux, who helps oversee about $50 billion as head of fixed income at Investec Asset Management in Cape Town.

South African Reserve Bank Governor Tito Mboweni said April 7 he “would not be surprised” if the economy shrank for a second consecutive quarter in the three months through March, following a 1.8 percent contraction in the fourth quarter. The bank cut its main interest rate 3.5 percentage points in the past five months to 8.5 percent, the lowest since Dec 2003.

Rate Outlook

Lower interest rates can make a country’s currency less attractive to investors and traders on a relative basis. Brazil’s benchmark rate is 10.25 percent, while its level of unemployment is 9 percent, compared with 23.5 percent in South Africa.
“There is a risk that the stronger rand will be followed by much deeper interest-rate cuts,” Rian le Roux, chief economist at Cape Town-based Old Mutual Investment Group, South Africa’s biggest private money manager, said in an April 28 speech. “If rates fall faster we could see another consumer boom, but a harder landing later.”
Traders are also concerned that Jacob Zuma, due to be inaugurated as president May 9, will destroy the nation’s reputation for fiscal discipline, said Peter Rosenstreich, chief market analyst in Geneva at ACM Advanced Currency Markets.
Zuma’s rise to power, which saw him acquitted of rape and escape graft charges, was backed by trade unions and the South African Communist Party, which want the government to ease budget restrictions and amend economic policies.

Zuma’s Pledge

As leader of South Africa’s ruling African National Congress, Zuma has pledged to create 1.4 million jobs by 2014 to reduce South Africa’s unemployment rate, the highest of 62 countries tracked by Bloomberg, and expand monthly welfare payments to children as old as 18, instead of 15 now. He also promised on May 2 to establish a rural infrastructure development program to create “decent work opportunities.”
“Zuma is the X-factor that makes South Africa worse than other emerging markets,” said Rosenstreich, who predicts the rand may depreciate to 10 per dollar by year-end.

Zuma-led spending increases may widen South Africa’s largest budget deficit in more than a decade, which the government estimates will reach 3.8 percent of gross domestic product this year. Even so, the rand has rallied since Zuma’s ANC won South Africa’s fourth democratic elections on April 22, gaining about 7 percent.
“It doesn’t help South Africa’s export prospects,” said Murat Toprak, a senior strategist at Societe Generale SA in London who recommends investors sell the rand because it will weaken to 9.30 per dollar in three months. “You don’t want a currency that’s too strong if you want to take advantage of a global economic recovery.”

As a South African now is the time to be looking at opportunities offshore. The Rand is strong and there are fantastic opportunities offshore. Go to for more information.

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