Double jeopardy and more for the Rand

FNB Comment, by Cees Bruggermans

It isn’t only that the Rand faces the determination of the Fed to steadily ease US monetary policy yet more through persistent bond buying, injecting yet more liquidity, aiming to lower its yield curve yet more, and by implication weaken the Dollar yet more.

Europe faces its own complexity, in its case its many peripheral Club Med countries with their overextended sovereign debt realities. If it isn’t Greece or Portugal, it is Ireland that has the markets hopping in the light of core European determination to reintroduce market discipline into sovereign borrowing.

Never mind that existing debt is guaranteed and that the new rules will only apply to new debt issued, probably only from 2013 as the existing lifeboat runs out.

It is a thought sufficiently unsettling for investors to start walking away from these countries now, signaling the extent of the haircuts ultimately expected by the market (even if only on debt not even issued yet).

All these concerns seem to be weighing on the Euro, as it looses its shine even in contrast with the troubled Dollar, and in fact loses some more as markets revisit the whole Eurozone concept and the Euro. Who will stay and who will leave, eventually, presumably after much drama not good for the Euro complexion?

So that, for all practical purposes, is two major currencies on skids, at least for now.

One can add the Yen to this twosome, as Japan doesn’t want its currency to appreciate too fast, willing to intervene (it costs them next to nothing, with their rates and yields near zero), trying to break the Yen’s ascent (ultimately not preventing it, but at least giving it a spirited try).

Also add the Yuan/Renminbi. For though the Chinese can be ever so polite, especially ahead of major political global gatherings, its gestures ultimately remain minimalist, in the spirit of accepting only gradual change stretching over many years.

Of what remains, there are a few smaller countries like Korea which are prepared to also heavily intervene, actually achieving currency depreciation. Others like Brazil have tried forex accumulation and transaction taxes. Many others have tried variations on these themes, trying to prevent shock-like currency appreciation.

Very few remain as pure floaters, Aussie, Singapore amongst them.

South Africa apparently isn’t quite a pure floater anymore, steadily buying forex reserves, hinting that the public sector pension scheme may diversify more overseas, and relaxing exchange controls.

Still, if the Americans are actively depreciating the Dollar (never mind what Geithner and Bernanke are claiming to the contrary) and the markets are (again) actively pummeling the Euro, and the Japanese, Chinese, Koreans and others are actively trying to prevent being sacrificial lambs, the ones remaining to get the appreciation treatment are dwindling rather alarmingly in number, with the market dislocation potentially facing them rising to outsized proportions.

So can the Rand still weaken in response to own actions?

Or is the Rand going to be one of those currencies becoming more thoroughly overwhelmed by events in 2011, getting closer to 6:$ (if not beyond) and 9:€ (if not beyond), with roughly similar firming still ahead against Yen, Yuan, Won and many others?

This is a vexing question.

Until we get greater clarity on American attempts to refloat its economy adequately (would it take three, five or seven years?) and Europe succeeding of getting on top of its peripheral strains (would that be three, five or seven years?), and Japan, China, Korea and many more holding out against forced currency appreciation (would that be three, five or seven years?), South Africa is facing fascinating prospects.

It may turn out to be bleak for those businesses and their labour that cannot overcome the increased export difficulties and import competition.

It will be great for households and domestic-oriented businesses benefiting from improving purchasing power and lower interest rates.

These global influences are apparently becoming steadily more radical in their impact, despite our announced efforts to resist.

If 2009-2010 were interesting on this score, I expect yet more such pressures in 2011-2012.

Provided another commodity inflation shock is not immediately around the corner, these global conditions can assist in giving us a still lower inflation trajectory than forecast by most at this late stage.

As to what it will mean for interest rate and asset market prospects, there may remain interest rate downside for as long as inflation doesn’t revive noticeably and the economy doesn’t succeed in narrowing its output gap more decisively.

Asset markets should continue to boom, except for property being structurally credit constrained as discussed in the Fixed Investment Round Table analysis last week.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics