Authored by: Guru

The Business Day of Monday 3rd June carries an article on the front page by Ray Hartley about the rand and Mr Zuma. He makes the good point that Mr Zuma could hardly have done more than arrange for his deputy president and ministers of finance, mines and labour to urgently intervene to resolve the labour problems in the mining industry – but that because he is “damaged goods” our president’s speech did nothing to prevent the rand from falling.

What Mr Hartley does not take into account is the fact that the rand has been falling steadily for two years and its sudden collapse last week has probably got more to do with the intervention of international currency speculators and the imminent reversal of the carry trade than anything Mr Zuma might or might not arrange. Consider the chart of the rand going back to July 2000:



The currency of a country is like the shares of a company. If the country is expected to do well, then its currency goes up relative to the currencies of other countries – just as the shares of a company rise when it is expected to be profitable. This is obviously a function of the quality of management and the perceptions of existing and potential investors. For about five years, South Africa has been doing many wrong things economically and this pattern has taken root in the minds of international investors causing the rand to fall. Now that fall has suddenly attracted the attention of international speculators (George Soros et al).

Another major factor is the imminent reversal of the carry trade. This is something that will impact all emerging market economies. The carry trade came about because interest rates in the first world (America, Japan and Europe) were much lower than in emerging markets. This made it possible for international investors to borrow money in first world countries and then invest it in emerging markets to make a handsome profit.

Now that the South African economy is looking shaky while the US and Japanese economies are beginning to improve and Europe is at least stable, the carry trade is beginning to reverse. International investors realize that they need to move their money out of South Africa and place it in America or possibly Japan. The amounts involved are enormous – well beyond the ability of our Reserve Bank with its paltry R50bn in reserves to counter. So the rand is falling and will continue to fall more or less no matter what the government or Mr Zuma does now.

The real question is, “Is this a short period of negativity like that from September 2011 to February 2012, or is it the start of a major move like the moves of September 2001 and September 2008?”

That probably depends a great deal on what the government does right now and over the next few weeks. Unfortunately, doing the right things would almost certainly be political suicide Zuma because it will involve radical changes to the labour legislation which would be anti-union and pro-business.

If Zuma does exactly the right things he may be able to hold the rand at just above R10 to the US dollar, but if he fumbles the ball we could see the rand at R15 or even R20 to the dollar in short order.

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