ZAR reaches all time low
-The Rand continues to lose its value
against the ever-growing U.S Dollar-
For the South-African economy, Friday the thirteenth was indeed a day of horror, as the Rand value fell to its all time low in 13 years. According to the British spread - betting company, Capital Spreads, the Rand traded at an all time low of R12.5271 per U.S dollar on Friday the thirteenth of March between 14:00 and 15:00. The Rand increased to 12.5271 per U.S Dollar from 11.53 in
February earlier this year. Showing a deficit of 1.42 % over a period of one month. This is the South-African Rand's biggest downfall since 2002.
Investors seem to believe that the sole reason for the Rand's downfall, is the riskier emerging
market assets that is falling under pressure from increased expectations that the Federal Reserve could raise rates, by the middle of this year. Others believe that the rand took the brunt of investors' exit from emerging market because of its long-standing budget and current account deficits. "It remains a dollar scenario. The dollar is just not stopping, emerging markets in general are under huge pressure" said Ion de Vleeschauwer, a currency dealer at Bidvest Bank. Vleeschauwer also said that the 13.00 per dollar will be the next target for the market to chase, and looks like it's going to be achieved without much hassle. The South-African Rand averaged 4.98 from 1972 up until 2015. This just shows how quickly the rand escalated to an
all time low over the past couple of years, considering that the Rand has exceeded the 6.00 in 2005.
The Rand has depreciated by over 100% over the last 10 years, averaging a depreciation of 10% a year. The Rand reached an all time high of 12.52 in March 2015 ,whilst its record low of 0.67 was recorded back in June 1973. Goolam Ballim, chief economist of Standard Bank, gave 5 reasons to why the growth of the South-African rand is depreciating:
1. Commodity prices have been weak and the Rand is a commodity currency.
2. In an environment where China is unlikely to stoke commodity prices, the rand is unlikely to
become stronger.
3. The Rand is undervalued.
4. South-Africa's current account deficit will remain sticky over the near to medium term.
5. Of course, a stronger dollar.
"With little in the way of data today, (dollar) performance will continue to drive the (rand) and, in
turn, local yields" -Barclays Africa-
If South-Africa should fail to create an investment climate through addressing the electricity
challenges and creating a more harmonious labour market, we will continue to forego market
shares and face an increasingly closed global export market. This would be a blessing in discuise for the Zimbabwean economy. Zimbabwe sees the falling rand as potential growth for both individuals and Zimbabwean companies.
Zimbabwe, which is a net importer of goods from South Africa, and uses the much stronger
currency, the U.S dollar , is set to benefit from the weakening rand value. Zimbabwe's import bill from South Africa stood at 2.5 billion dollars in November 2014. "If we are to maintain the same quantities, our import bill will certainly come down and this will go a long way in easing our current liquidity crunch" said a Zimbabwean investment analyst.
Most of the processed goods in Zimbabwean
supermarkets are imported from South-Africa,with the country's largest exporter, OK
Zimbabwe, importing more than 70% of its
groceries from South Africa. TM Supermarkets, OK's biggest competitor, also sells mostly imported goods as it's partly owned by South- African retail giant Pick 'n Pay. "South -Africa's credit is unlikely to change at another review in June or in the next 24 months, but an electricity crunch will shave 0.3% of this years economic growth" claimed Standard & Poors. Traders prefer to focus on underlying economic weaknesses, including chronic electricity shortages and labour unrest.
Surely, wage demands from the public sector, which are way above the inflation rate, and
funding to the cash-strapped power utility Eskom are a risk to growth. Primarily, structural
weaknesses and energy shortages are the main reasons to why we have a weak outlook on growth. Eskom has struggled to meet electricity demands because of a lack of funds to
upgrade its ageing infrastructure, forcing it to implement controlled power outages to prevent the grid from being overwhelmed in the worst power crisis since 2008. According to Barons.com, these are the three main areas that influence the growth to the U.S's
economy and its ever-growing currency:
1. The U.S is currently displaying the best momentum relative to its trend growth pace, according to other major economies. The U.S has grown a healthy 3% in the third financial quarter of last year, following a 4.6% growth in the second. This , in contrast to the Eurozone, China and Japan, have shown signs of relative stagnation over the summer. Traditionally,
fast growing economies have rising currencies due to capital inflows.
2.The Federal Reserves looks set to increase interest rates in 2015, unlike the European Central Bank or the Bank of Japan. All other things being equal, investors like to hold their assets in whatever currency pays the highest short term rates.While short term rates are
close to zero across the developed world today, expected rates hike from the Federal
Reserves should change this over the course of 2015. If investors expect the dollar to be in favour, then, because of higher rates, it makes sense to buy dollars today to take advantage
of the expected appreciation.
3. The Shale energy revolution is
having a major impact in reducing
the U.S trade deficit. To put this
in perspective, in 2005, the U.S
consumed 20.8 million barrels of
petroleum products a day, of
which 12.5 million, or 60 % had to
be imported. In 2013, the U.S
consumed 19.0 million barrels, of
which 6.6 million, or 35%, were
imported. By 2015, the U.S will
consume 19.1 million barrels, of which just 4.1 million barrels, or 21 %, will be imported. In other words, while the
long term trend is startling, even the increase in domestic production between 2013 and 2015 could save 2.5 million barrels per day. At $ 90 a barrel, the U.S would cut roughly $80 billion from a $480 billion trade deficit. This is a clear positive for the U.S dollar.
