Posted: 2008-10-23 23:58 Hard time rands  Presenter: Giulietta Talevi Guest(s): Brigid Taylor - Click here to listen to the interview Summit TV speaks to Brigid Taylor currency strategist at RMB about the depreciating trend in the rand Giulietta Talevi: Welcome to Face to Face. The rand was the main story on Thursday. In the Summit TV studio is Brigid Taylor currency strategist at RMB. Brigid, are we being picked on unfairly? If you look at the beginning of the month we were trading at around 8.20 but last night we hit 11.60 to the dollar… Brigid Taylor: It has been a very volatile month. Keep in mind possibly the last five weeks have been some of the most volatile any of us have experienced in years. From that perspective Trevor Manuel said quite adequately the other day when he made his Mid-Term Budget Policy Statement that the ferociousness of the storm we are currently in was totally unexpected. I think that rounds it off very adequately. From a rand perspective we are currently trading at much higher levels than any of us thought - we were calling nine at the beginning of 2008 and a lot of people laughed at us thinking we may see stronger levels. Unfortunately that presented itself - and much worse. We’re currently trading around the 11.70 level against the dollar -although the risk still does remain to the top because risk unbundling persists across all sectors. If you look on the global front you’ve got the euro and the pound - those unfortunately are also losing significant ground against the dollar currently. Giulietta Talevi: Are you saying that we’re being sold off to the same extent the other emerging market currencies are, or it’s actually worse on the rand? I was looking at a graph - I don’t know if it was accurate or not - but I think we have depreciated about 70% against the dollar since the beginning of this year? Brigid Taylor: Yes, we’ve depreciated quite significantly specifically in the last month with what’s happened globally. There’s been some significant factors - there was the Freddie Mac and Fannie Mae scenario, we had AIG, we had Lehman Brothers, we had the central banks intervening. We’ve had a lot of serious global re-evaluations. Because of that we’ve seen unbelievable unbundling of risk and holding onto dollars in the form of cash - what’s ended up happening is the dollar has strengthened to unbelievable levels specifically against global currencies, and the emerging markets because they’re deemed risky assets obviously have seen significant moves. On a positive note from the rand’s perspective we are currently seeing that our fiscal policy remains well intact. Looking forward there is going to be risk because of the rand levels that we’re currently trading at. Inflation looks like it’s at the top of the curve - although that does still remain risky because of rand being at weaker levels - but we are still looking to see the rand and the inflation levels start to come off, and inflation specifically towards the first quarter in 2010. The central bank is actually calling it earlier - they’re calling towards the third quarter of 2009. Giulietta Talevi: So you don’t think Tito Mboweni is necessarily going to step in and hike interest rates? Brigid Taylor: I think it’s very unlikely. I think you’re possibly going to see a lot of speculation around whether or not interest rates will be hiked - because of the risk the rand levels we are trading at poses to inflation - so obviously there is that concern. So there is always opportunity - and the option will be posed that we could see another interest rate hike - but I would say it’s unlikely because that will seriously strangle growth. If we’re looking at a global recession is that the route that we’re likely to take? On top of which we saw an interest rate hike out of Hungary yesterday of 300 basis points - totally out of the market in terms of what people were expecting, yet it didn’t strengthen their currency. The big talk in the market today is what does that mean in the next couple of chapters going forward for them to maintain growth? Giulietta Talevi: So you’re saying effectively if the Reserve bank does step in and hike interest rates it might essentially be a futile exercise which would actually have more devastating negative consequences? Brigid Taylor: I think so. It’s going to be interesting to see if the rand sustains these sorts of levels. It’s been very volatile - and it’s moved very aggressively and quickly. We’re still at the situation where it’s early days - we’re only in the first week of this really significant push through nine to 10 and to around the 11 level. Whether that maintains is going to be the big question. I think that’s what the SA Reserve Bank is going to be keeping an eye on - the sustainability of the rand at these levels. Keep in mind the flip side of that is the rand at these weaker levels obviously also assists our current account to some percentage - because unfortunately we still import more than we export. That also bodes relatively negatively - the current account isn’t great. That’s unfortunately the flag that investors see offshore - that is something that will keep investors at bay, and risk unbundlers will look to South Africa to unbundle as one of their first ports of call. Giulietta Talevi: Although as you mentioned it’s good for exporters. In a trading note this morning RMB said there were potentially five steps that the SA Reserve Bank or policy-makers could do to try and stabilise the situation on the currency market - we’ve talked about a potential interest rate hike, and we’ve already discounted that - but what other measures could they take? Brigid Taylor: They could borrow money from the IMF. I also think that’s highly unlikely. We don’t have a lot of foreign debt - we’ve managed to maintain that quite adequately, and in fact that’s one of the plusses for South Africa. We could possibly tighten exchange control. Those are the kinds of measures the Reserve Bank can take. I think at this point where the Treasury came in and certainly saw ahead of the curve was the fact that they budgeted for a surplus - so there was already a surplus that created a buffer for the scenario we currently find ourselves in, and there was something that could just back us in these times that I think is very prudent. Going forward though it’s going to be interesting to see how much of that is going to be able to buffer us enough, and whether or not we will have to utilise other resources. We can also issue offshore - but that’s another scenario, and do we really want to go that route? Those kind of scenarios are the worst case and certainly “Plan B.” If we can maintain - currently our financial systems have remained intact, and we haven’t seen government having to intervene in terms of bailing out any of the local institutions - so that’s very positive. I think what’s possibly going to happen is once investors’ dust settles around risk aversion possibly they will start drilling into South Africa saying “this is an economy that’s really withstood, hasn’t had to rely on government intervention, hasn’t had to rely on offshore funding, and has actually maintained - from that perspective it’s possibly a good investment opportunity…” Giulietta Talevi: So possibly fundamental sense should return. The SA Reserve Bank Governor is speaking tonight at a Bond Exchange awards dinner - if he doesn’t say anything about the rand and intervention would short sellers take that as an opportunity to carry on shorting the rand? What do you think the influence of short sellers is on the currency’s moves at the moment? Brigid Taylor: I think the speculation hasn’t been as rife as you’ve potentially seen in central Eastern Europe. On the rand we’ve unfortunately been strangled by the fact that there are less and less price providers, so the market happens to be quite illiquid - or is more tightly strung - because of the lack of depth in the market. What you end up with is wide prices and you have quick and very aggressive moves within the market. That’s the kind of scenario that you’re finding yourself in. My personal call is I hope Tito Mboweni stands up and at least does some form of verbal intervention. I don’t think that there’s going to be any aggressive formal intervention on behalf of the SA Reserve Bank - it’s not really their policy to support the rand in that manner - but certainly mentioning things like possible deals that are on the table from a foreign investment perspective, and then obviously the likelihood of potential interest rate hikes. Those hopefully will alleviate some of the stress around the rand and potentially support the rand a little bit. We feel that the rand at the moment looks a little bit toppish because of the significance of the move that we’ve seen, but I caution to say we are still risky on the topside and potentially could even see 12.10 traded. Giulietta Talevi: That’s my last question. Where do you think the next move will be - to weaker or slightly stronger levels? Brigid Taylor: We’re starting to see slowing momentum around 11.80 against the dollar - it slows up there, and then it pulls back. That’s starting to signify there potentially is a top around that level - although if we break through there it does open up 12.10. On the technical side 11.30 was quite a significant level - should that break we open up to 10.80. That’s the scenario we’re hoping for in an optimistic light. But I think that you must bear in mind based on what we’re currently seeing we are sitting where we’re trading alongside what’s happening on the equity exchanges - and we saw a massive sell-off yesterday. That’s part of the reason for the rand weakness today. Then on top of that there’s persisting risk aversion around concerns of global recession. www.summit.co.za Transcripts: 082 962 2772 mvr/met Comments Related to this transcript: Comment on this transcript... Name : Email : Comments :