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How does a weakening rand affect you?

Currency volatility might briefly benefit a few, but most experience a reduction in purchasing power, says Old Mutual MM’s Dave Mohr.

SIKI MGABADELI:  We are looking now at how a weakening rand affects you. You’ll remember last week Wednesday the rand hit a seven-week low against the US dollar, and that was blamed on the ANC’s proposal to nationalise the South African Reserve Bank. But we know there are far more underlying reasons. So we are looking at those and will then hear how that affects you.

Let’s chat to chief investment strategist at Old Mutual Multi-Managers, Dave Mohr. Dave, thanks so much for your time today. I think this time last week the rand was around R13.39/dollar. We are a little better today, around R13.25. But the trend has not been good, has it?

DAVE MOHR:  No, we’ve seen the rand obviously changing a lot. At one stage it was well below R13 and it moved up to about R13.50. As you said, it’s stronger now. But I think what we must realise also is that, if you look at the rand a little longer term, surprisingly enough the currency has strengthened.

SIKI MGABADELI:  We’ll talk a little about what the factors are that have led to the volatility, and some of the strength that we are seeing right now. But let’s get to the heart of it – the impact of a weaker rand on the average South African.

DAVE MOHR:  Well, as the previous speaker, Mike Schüssler, said, a weaker rand means essentially that consumers are less well off. It means that for stuff that we import from outside South Africa the prices typically increase, which would tend to put upward pressure on inflation. The Reserve Bank will become upset if inflation starts increasing or is projected to increase, and will typically hike interest rates under those circumstances.

So from that point of view as far as the consumer is concerned, it means a reduction in the purchasing power. So typically they can buy fewer goods and services in the economy.

SIKI MGABADELI:  And that affects, particularly, middle- to lower-income households.

DAVE MOHR:  Absolutely. I think typically that’s what we find. Even food prices tend to be sensitive to currency movements because a lot of our [crops], if you think of wheat and maize, etc, those are priced on prices internationally, and you just have the currency locally. And as the currency depreciates those prices go up.

We must also remember that, longer term, if you are, let’s say, employed by somebody that manufactures something in South Africa, or you work for the mines, it typically will help at least the people that work for those industries.

SIKI MGABADELI:  Let’s talk about the volatility right now, and the kind of strengthening we have seen. What have been the factors moving the rand?

DAVE MOHR:  As you mentioned, the talk about potentially nationalising the Reserve Bank has caused a lot of anxiety among investors locally and internationally. I think that has had some impact. But typically what we find is, if we look at the currency over time, international capital flow considerations – what are we talking about now is whether investors internationally are buying equities and buying government bonds in countries like South Africa classified as emerging markets. And those things typically override, over time, considerations of what happens in the local economy.

What we have seen over the last two weeks is that there was a conference held by the European Central Bank in Portugal where a number of central banks spoke and indicated that in future they will probably tighten policy, and that led to a general weakening of these emerging market currencies.

SIKI MGABADELI:  We’ll leave it there. Dave, thanks for your time.

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