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More cards to line up before rand is seen as fair value

We are still a little weaker than we could be – Greg Kennelly, currency and rates trader at RMB.

SIKI MGABADELI:  The rand has had a great run over the past couple of months, along with other emerging market currencies, despite the interest-rate rising in the United States and expectations for more. Will it continue on this rampant path? What’s going on.

Let’s chat to Greg Kennelly, who is a is currency and rates trader at RMB. Greg, thanks so much for your time today. Why are we at R12.63 when just a year ago we were worrying about R17/dollar?

GREG KENNELLY:  Absolutely. As you mentioned earlier, we are at a 19-month high. That’s not only against the dollar. That’s against the euro as well. And against the pound we are at a four-year high. So the rand is doing extremely well and we are all very happy about it.

Before we go too much into why it’s here and where it can go, I just want to take a couple of steps back and look where it was previously. If we go back four years, we were trading in the tens. If we go back six years, we were trading in the eights, and if we go back a little further than that, we were below R7.

When we look at a holistic picture and we look at an inflation weighted-rand, we actually see that with this massive rand rally, we are still a little weaker than we could be. That’s the first thing.

The second thing is, another reason for the rally was when you are looking at where the previous high was, emerging markets were all under pressure. We ourselves had a ratings downgrade, we were looking at another potential rating downgrade, and we found the rand was on the back foot – this also pre-Nenegate. So when you look from those levels, actually we were already weak. So a lot of what we’ve seen is recovering previous losses.

SIKI MGABADELI:  Okay, so we shouldn’t get too excited about it.

GREG KENNELLY:  Well, that’s the one point, so you shouldn’t get too excited. The banks don’t get too worried, because my point is actually now that you’ve seen it at a two-year high, don’t think there is no more to go, because I actually think we can get stronger.

I base that on three major factors. The first is, as you mentioned in the introduction, that the Fed hiked rates. Normally that’s negative for the rand but that’s important because the global world view is getting better, especially in the developed markets. And that’s obviously going to encourage emerging market strength, encourage emerging market growth.

SIKI MGABADELI:  We are seeing this normalisation, right, of interest rates around the world. They’ve spent so much time pumping money into their economies, into the markets, because they are worried about deflation. So this normalisation – what do you think it will mean going forward, then?

GREG KENNELLY:  Well, firstly, it’s meant to happen. One of the main reasons is if you’ve got near-zero rates, which the US had, think about pension funds, for example. Pension funds are getting almost zero capital growth. What happens is that anyone who is a pensioner is spending more than their capital is growing. And that’s why they are using it to normalisation as opposed to tightening. They just want to get them onto a slightly normal path. Janet Yellen often refers to the term “gradually” because they want to get gradually there. They don’t want to spook the market. We saw in 2013/14 the paper tantrum that the market liked to call it, where the Fed just mentioned pulling out of quantitative easing, and we had one of the biggest sell-offs in rand currency, rand bonds and equity markets that we’ve seen.

But anyway, just on the rand side RMB seems very …[indistinct] inflation coming out this year. We think it’s going to be slightly better than the Reserve Bank is thinking, and we tend to think that towards the end of the year it can breach 5%.

Now, I don’t think that the MPC is going to hike as aggressively as that, so I think we are going to see an increase in real rates and more investment into South Africa and people searching for yields.

SIKI MGABADELI:  Okay. Do you get a sense that we are going to maybe stay flat line on interest rates this year, and potentially somebody brave, talking about a potential cut in South Africa?

GREG KENNELLY:  I’m more of the potential cut than flat lining. I saw the … necessary two cuts, and inflation is going to come off. Global fears are receding, but I still think that we can see currently 25 to 50 basis points this year. I don’t think it’s going to be a meaningful cutting cycle. But certainly one or two cuts this year would be on the cards, in our view. The Monetary Policy Committee doesn’t want to be too aggressive, in effect. They are very worried about the downside negatives of… … …So I don’t think they want to be too aggressive in it. But, having said that, I think there is going to be scope for it. The economy needs it. We are also looking at near-zero and potentially recession growth towards the end of this year. So I think the economy is going to need a little bit of a boost …

SIKI MGABADELI:  How do we work out fair value for the rand?

GREG KENNELLY:  Well, unfortunately that’s not a very easy thing to do. I’ve looked at a couple of examples. As I mentioned earlier, … inflation to the exchange rate, where I basically looked at peers of stability and maybe fair value there. And I said, well, if we apply inflation what do we get to? This is very optimistically slightly under sub-R10/dollar.

The other analysis I looked at is what we’ve had with blowouts. So obviously we’ve had the 2002 blowout, and the recent Nenegate. I’ve tried to comparisons. Now, once again I can’t really do [that] because when we had the previous blowout, the Fed was in a different situation; the Fed was in a cutting cycle, whereas now the Fed is in a hiking cycle. So you can’t really compare it. That analysis also came with a  fair value of the rand in the tens. So those are two.

Now the third one is one which we are very cautious of. And that’s taking in political risk or potentially … into account. Unfortunately that is what the rand is always going to have. Actually all emerging markets are going to have this.

But we are sitting at the moment not knowing whether we will by tomorrow morning on my day off suddenly get a message of a cabinet reshuffle.


GREG KENNELLY:  Now unfortunately there is always going to be a premium placed on that. So if you are looking at fair at fair value, I would say you are actually looking at around sort of R11.50. That’s a full rand away from where we are now.

SIKI MGABADELI:  I love that.

GREG KENNELLY:  I am quite optimistic. I think you need to be if you are a South African. Certainly we are expecting it this week to be trading at R12.50. And I don’t think this week, but probably the week after, we’ll see a break at the R12.50 level and down at the R12.30s, R12.20s. The R11.50, …the fair value that I was mentioning, is probably a little bit further down the line. It does really need a few more cards in line to happen.

SIKI MGABADELI: We’ll leave it there. Thanks, Greg. Greg Kennelly is currency and rates trader with RMB.

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Good time to move some money off-shore

Agree. Till AA/BBBE-EE in the current form abandoned no hope for a meaningfull fully inclusive economy.

As SAs we cannot do much about offshore perception (& therefore the ZAR/US$ xrate) but we live in SA we know what is really happening. We know who can perform and those who cannot. We know who are inherently corrupt.

We know that stars are not aligned yet for the good story that could be told.

What a tragedy.

@Robin Hood – Agreed, although I’d wait a bit longer before moving significant amounts offshore. Looking ahead – once the new land expropriation bill comes into effect and civil unrest accelerates the next big Rand dive will commence.

This article is classic “be careful what you say” monetary economic BS. What you are ignoring are the fundamental structural weaknesses in the SA economy. It’s anybody’s guess how angry the masses of unemployed South Africans out there need to get before they rise up en masse….

Indeed BEE and AA has been the biggest unmitigated disaster for South Africa’s economy.

It is a political policy that destroys economic efficiencies by pushing people into jobs that they didn’t earn, and so promotes laziness. It also forces the creation of jobs that are not needed simply so that businesses can make up numbers to keep the politicians happy and so makes the economy less efficient and so, less competitive.

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ZAR / Euro



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