Rand sinks away 2001-style   

The last time the Dollar more than doubled in value against the Rand was in 2000-2001, when it went from 6:$ to 13.85:$. By Cees Bruggemans

This time it took five years to crack the same barrier, from 7:$ in 2010 through 14:$ in 2015. These past four weeks we added over 40% to that originally 2010 base, the Rand trading near 17:$ late last night. That was after a very volatile day, starting with a few stop-loss margin calls driving a flash-crash, highly illiquid market in Japan reached 17.90:$ which subsequently corrected to 16.50:$ as our Rand market opened. Things are going very fast now, as they did in the closing months of 2001, when all brakes had been removed and the one-way trend was the short-seller’s friend.

Events are of course different today, even if the momentum is the same. Even so, at least some of the elements doing the Rand driving have a similar origin, this aside of once-off exceptional Japanese margin calls. And the only question is: have these main forces exhausted themselves, and is the Rand rout nearing an end? Or are these forces still in full bloom with (much) more to come?

The main drivers today are the Chinese Combo (slowing growth impacting on commodities and also on financial market unraveling), the Fed liftoff (raising yield expectations globally, also inviting greater risk differentiation) and the own home brew (clashing ANC and business paradigms inviting stagnation, drought offering devastation, and hazardous Zuma actions and denial imposing severe penalisation, all of it undermining our growth and heightening our risk rating, with credit junk status looming ever larger).

None of these forces looks close to exhaustion.

The Chinese growth transition from heavy investment and export dependence to services and consumption reliance is a decade-long affair. Chinese investors have had their Minsky Moment and are exiting, not just the stock markets but also the country, with Chinese forex reserves so far down $500bn to $3.4 trill, and so far only a minor 10% Yuan depreciation. This unravelling appears to take place in bursts, interrupted by government support actions. That only suggests a longish play rather than a quick cleanup.

Global commodity Dollar prices have more than halved since their peaks, and in some instances are down to a quarter peak levels (iron ore, oil), with market talk of Brent spot, now at $31, going even as low as $18.

There are hopes commodity prices such as energy can bottom this year and double in the subsequent bouncing ($80 oil being mentioned) as supply sides consolidate and market balance is restored. But that is not a given, neither from the demand side (with further impinging to go) or from the supply side (many protected by even faster sliding currencies, and staying the course).

There are many obstacles on the Fed’s path to full normalisation, not least global tensions and spillovers (China, Middle East, Europe) as well as inflation refusing to make a comeback as scripted (reflecting easing energy prices, global labour slack and intense trade competition). It likely will keep the Fed slow, even if steady growth and labour absorption will sustain its persistence. Perhaps not four rate hikes per year as projected by the Fed, though enough to normalise by 2018-2019. But that would mean FOUR long years of Fed liftoff, rising global yields, firming Dollar and competitive currency devaluation wars with just about everyone else.

As for clashing ANC/business paradigms, and Zuma in denial, that could easily be another three year ride, to which severe drought adds short-term spice, but no guarantee it won’t last another two or three years, too. Spelling slow growth, if not recession, imposed by outside and inside forces, making finance minister’s task an impossible one, and junk status an eventual reward?

None of these forces look old and spent. All may keep running with the ball for some years yet. With SA fingered as weak, exposed, in denial, banal and misguided, one should not be surprised to see this reflected in the market ratings.

So Rand weakness may be far from over, short of strange outlier scenarios smacking of desperation. Say a President Trump nuking Iran, annexing Saudi and gold adding a zero or two as alternative safe haven (I am trying to be inventive).

I mean, stranger things have occurred in our past, and “windfall” is our middle name (our given name being Disaster, of course?).

With so much global volatility and growing fear on the loose, we surrender to traders making the Rand their play thing. Thus in the short term the Rand still has remarkable weakening potential, well past 20:$, with episodic clawbacks, as contrarians try new ways to lose their shirt (alternatively harvest volatility, playing it like a honky-tonk piano).

Lucky exporters and industries seeking protection (farmers, miners, industry, inward tourism). Everyone else pays the price of more costly imports, especially food (with drought devastating crop estimates), but also all investment goods, cars, electronics. A major mix-up of input and output costs, and shift in demand and supply, as we adjust to this forceful rearranging of our national furniture.

Until all becalm and new forces come to the fore, possibly to our rescue. Real 2020s stuff. Still a long time away?

• Cees Bruggemans  is an economist at Bruggemans & Associates
• Email TechFinancials.co.za at editor@techfinancials.co.za