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Local currency remains resilient

Four reasons for the rand’s gains – Isaah Mhlanga, macroeconomist – RMB.

NASTASSIA ARENDSE:  The rand continued to push stronger against the dollar at midday earlier today and, and the rally was extended owing to a softer dollar boosting emerging market currencies despite the local market being closed yesterday.

Isaah Mhlanga, the macroeconomist at Rand Merchant Bank, joins us on the line. Isaah, thank you so much for your time. For those who were excited this morning and all kinds of tweets about people going on holiday and all sorts of excitement, to what can we attribute this performance?

ISAAH MHLANGA:  Thank you, Nastassia for having me. Certainly it is a happy day in markets in particular for the rand and other emerging market currencies.

But I think this is not a South Africa-specific story. It’s really a global search for yield by advanced-economy asset and money managers. This is happening because, for example, in Denmark, Germany, Switzerland and Japan government bonds are trading at negative yields, and negative yields happen for about four reasons.

The first of them is that this is simply the result of active monetary policies trying to stimulate economic growth in a world where bond supply and demand is unbalanced. So you have global central banks trying to stimulate the economy by cutting interest rates to negative territory. When they do that of course fund managers, who have mandates to invest and achieve a particular rate of return, have to search for better yields elsewhere, and that yield is obtained in emerging markets.

The second reason is potentially that bond yields are forecasting a slowdown in economic growth globally and whenever market forecasts a slowdown you see that coming through into lower bond yields and eventually moving into negative, as we have seen.

The third reason is that you have investment mandates that track global bond indices. Now, if you have a supply of money that is being flooded by central banks, with fund managers failing to track bond indices, it only means that there is even more money chasing the same kind of yield that we are seeing, which means bond yields turn negative.

And the fourth reason that we see is that you have investors who require or prefer to hold bonds on the short end of the curve. Now, over the short end of the curve the yield that you get is impacted by what central banks do, and that yield is currently negative. Hence you see a migration from the short end of the curve into the long end of the curve. But even on the long end of the curve you get to see negative yields around the short end of the curve.

So essentially it’s a paradox of choices within funds that are investing in bonds. It’s essentially choosing the best of a bad lot. So that’s what we are seeing currently in emerging markets – portfolio inflows from advanced economies which further strengthen currencies.

The rand has particularly gained from those kind of activities. It’s not sustainable, at least over the medium term, because locally the economy is skirting with a recession, zero growth by our own forecast. The Sarb also is forecasting zero growth, so there is no disagreement about the sickness of our economy.

And again, if you add the current strikes that are taking place – Eskom, potentially in the car manufacturing industry, and also within the petrochemical industries – those are problems within our own economy. And again, towards the end of the year you have rating-agency worries again coming to the fore because rating agencies are worried about the lower economic growth, which is not anyway close to being seen.

NASTASSIA ARENDSE:  Isaah, thank you so much. Unfortunately, we have to leave it there. I’d love to get into this conversation a bit more in depth.

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