Rand: the only way is south

March 21, 2013

Any hopes of policy support for the rand from the South African Reserve Bank (SARB) have vanished.  The currency fell 1 percent after yesterday’s SARB meeting where  Governor Gill Marcus made it clear she would not be standing in the way of the rand’s move south. It is now trading at 9.32 per dollar.

More losses look likely, especially if foreign bond investors throw in the towel, a move which analysts at Societe Generale liken to “the market equivalent of a volcanic eruption”. Foreigners, after all, own more than 36 percent of the 1 trillion-rand market in local currency sovereign bonds.

Bearishness appears to have escalated since a Reuters poll of 32 analysts conducted in early-March.  Back then the mean forecast for the rand’s exchange rate in a month’s time was 8.94 per dollar, the poll found.  The 12-month mean forecast was for 8.787.

In a note this morning, Societe Generale said there was  “considerably more pain coming now that the central bank is not ready to provide some sort of backstop”.

Clearly, markets had expected a stronger statement from Marcus, who did recently say she thought the rand move looked “overdone”.  But the SARB has typically taken a more laissez-faire approach towards currency weakness. And right now there is another reason for this attitude — there is very little ammunition to mount any sort of defence of the rand.

Slowing capital and trade inflows have blown out the current account deficit, but the SARB’s reserve growth has also stalled.  This graphic from UBS shows how unfavourably South Africa’s reserve cover ratio  compares with most other emerging markets — only five other countries fare worse on this indicator:

Also,  liabilities against this war chest have been mounting,  driven up partly by corporate and bank borrowing.  Central bank data shows gross external debt as a percentage of GDP now stands at almost 35 percent, up more than 10 percentage points since early-2010.

SocGen (which had predicted a 1-month exchange rate of 9.2 per dollar in the Reuters poll) now sees the next stop for the rand at 9.60.  It also recommends selling 10-year rates to position for a bond market downtrend.

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