Rand to remain unpredictable

(From Reporterus Anonymus)  

Johannesburg - Echoing South African Reserve Bank (SARB) governor Tito Moboweni, who said it was impossible to predict the rand's value, economists warn that forecasting any currency is the most difficult variable to predict, as volatile capital flows overwhelm foreign trade flows. 

The rand's forecast range for the 2004 year-end is from R6.5 to R9.5 per dollar with a median of 7.5, while for 2005 it is 7.5 to 10 with a median of 8. 

Most economists believe that the main factor driving the rand's exchange rate against the US dollar will be the performance of the US dollar against other currencies such as the euro and yen. 

According to Martin Wolf of the Financial Times, the world economy is now divided into three parts: the US as the core country, and then a "capital account zone" and a "trade account zone". 

Countries in the capital account zone such as the Eurozone, Canada, most Latin American countries, the antipodes and South Africa, target domestic monetary stability, while letting private capital flows set exchange rates. 

The objective of countries in the capital account zone is stability with most operating an inflation-targeting regime. 

Countries in the trade account zone fix exchange rates, while trying to sterilise the domestic monetary consequences with the result that foreign exchange reserves balloon. The objective of countries in the trade-account zone is growth. 

To maximise growth, Asian mercantilists lend the US money with which to buy their surging exports. When they want repayment, the US will devalue and so partly default. Asian strategy is to grow by giving. 

That means that those countries in the capital account zone face a currency tsunami, which is being deflected their way by the US. 

The consequence of that is that the euro and yen will appreciate far beyond their June 1995 levels of $1.45 per euro and ¥80 per US dollar, with Martin Wolf suggesting that $1.60 per euro is possible. 

So what does this mean for the rand, given that dollar-based commodity prices will tend to compensate for the depreciation in the US dollar? 

If the rand goes back to R9.3 per euro, which is what numerous equity analysts and exporters are hoping will take place, then at $1.45 per euro, the rand dollar exchange rate will be at levels of R6.40 per dollar, while at $1.60 per euro, the rand will be near R5.80 per dollar (and gold will be near $530 an ounce). 

If however the rand recovers again to 7.40 per euro, then the rand dollar exchange rate will be near R5.10 per dollar at $1.45 per euro and at $1.60 per euro the rand will be near R4.60 per dollar, its 1997 annual average. 

 As yet, neither aggressive buying by the SARB in the foreign exchange market - it bought more than 3 billion worth of US dollar over the past few months - nor five interest rate cuts totaling 550 basis points since June, have led to any sustained rand weakness.