In this week’s Currency Focus podcast, TreasuryONE currency risk strategist Andre Cilliers gives us the lowdown on the rand’s movements. According to Cilliers, while further lockdowns and rioting could pose a risk to the economy (and investor confidence), the rand is mainly affected by what happens in the US and China. Overall, he maintains a positive outlook and says that unless there are any major surprises, the rand’s stability should continue for the rest of the year. – Claire Badenhorst
Andre Cilliers on Fed Chair Powell and the virtual Jackson Hole meeting that took place recently:
No tapering immediately in sight and yes, you mention that he’s not instilling any panic into the markets, but sometimes I wonder whether the stability that he pronounces or announces on interest rates is not the instability that people are looking for or concerned about because inflation is still way above target levels. They keep on insisting that it’s transitory. My problem is that if it stays there too long, then I make the comment that it might be applying for political asylum and stay there permanently. That’s a bit of a concern. You know, you can deny it for so long, but if it persists, then eventually you will have to do something about your interest rates, about your monetary policy and tightening it up to contain that inflation. When we look at the labour market and the salary increases that are being offered to people to come back to jobs, that’s not inflation that dissipates very quickly in markets.
On raising interest rates earlier rather than later:
I would certainly look at it a little bit earlier. They keep on insisting that they will look at it in 2023 – that’s a very long way off and that’s a very long time to sit with inflation in your country that’s above your target levels and with interest rates that are way below your inflation rate. So I would certainly, instead of making all the noises and all the words of saying, ‘I will not change monetary policy’, rather move to the stance of, ‘we will carefully watch inflation and if it seems to be continuing at the same levels for a considerable period of time, we will adjust monetary policy accordingly’.
On whether that would create panic:
I don’t want to say it will create panic. I just want to say that that would adjust levels in the market and give people more certainty as to what to work from and make their adjustments over a period of time, rather than waiting for it to happen on one specific day and then you have these massive moves. So I think it’s far better managing the process than waiting for a shocker.
On rumours of additional looting and riots:
Just a week and a bit ago, we had a deployment of police and [the] defense force again on the rumours that there will be a second round of looting and unrest in the country. Nothing came of it, but it still distracts people from what they should be doing and that’s growing the economy – managing and running their businesses. They still spend money in the wrong areas because they spend more and more and more on safety measures and security measures than what they spend on productive money into their businesses. That’s a concern and we continuously have to watch this.
We’re still seeing that people are being arrested, but nothing really comes from that. You know, you get arrested today, you’re out on bail in two or three days later. We all know how social media works. You can open another account under another name and you can start spreading these things again. So it’s a concern. It’s something that we need to put to bed and with elections that could come up – we’re still waiting for the Constitutional Court to make their call on whether it will be postponed or not – but with that coming up, it could spell further turmoil because I think the climate between political parties is not as good as it should be and that can cause further havoc. Apart from that, we have, as far as I’m concerned, a little bit of turmoil within the ANC. You know, you have political parties attacking the ANC because they’re not paying salaries. There’s funny things that come into play – especially during an election period, although it’s only the municipal elections – [that] can spell turmoil and trouble in the country.
On the data points Cilliers has been watching:
Well, we’ve seen that retail sales in South Africa came out just above 10% two weeks ago, which simply tells us that there is some growth, some demand coming back from retail spending from the consumer and that they are rearing their heads and showing their faces again in shops and buying and spending money. That’s a good thing that will aid businesses. We are seeing that there was a rebasing of the GDP figures and that the economy is, in actual fact, 11% bigger than what was anticipated. We must just keep in mind that if that is the case, then the growth figures that we’re going to get coming forward for the second, third, and fourth quarters this year will be based on that higher figure of GDP. So the expected figures of growth could be a little bit lower than what was anticipated simply because the base is bigger. But certainly, growth is coming back in South Africa.
We have inflation that’s well contained – that came in lower again. We are going to see a small petrol price increase this month; a decline in the diesel price. Now, the diesel price decline is significant in the sense that a lot of the logistical companies have got a high spend on diesel so that helps and will contain inflation even further. With our inflation rate being actually lower than that of the US, where we always had the situation that the currency needed to weaken because of inflation rate differentials, we could actually now say that we need to strengthen the currency because our inflation is lower than that of the US and it’s been like that for quite some time.
I do not think that our central bank will in any way budge and lower interest rates at this stage but it simply means that they have room to keep interest rates level at the same level where it is now for a longer period of time, which is a very stable environment and also is good for growth in the sense that your housing sector, everything could sit with stable interest rates at low levels where we are currently for a longer period of time. That could boost demand in the markets, even in terms of retail spending.
On Covid and further lockdowns:
Well, they’ve just announced that there’s a new variant that’s under investigation to see what the infection rate will be. Will the vaccinations be effective against that? But at the moment, if we look at the figures in South Africa, the Western Cape seems to have stabilised and [is] actually coming down a little bit in terms of infection rate. KwaZulu-Natal still on the uptrend, but also sort of a slow uptrend. The rest of the country [is] actually under control, and if I look at the positivity rate of tests, then it is slowly coming down. So for the moment, I do not think that we will have further lockdowns, but we do not know when a fourth or fifth wave could hit the country. I think the government has learned how to manage it and [is] trying to manage that without trying to hurt the economy too much. I think they will continue on that path, but we never know with the variants that develop. [The] vaccination program is on track and going well. So I think that will also reach a level of stability of some sort.
On what he anticipates happening for the rand:
I still think that we’re going to end the year between R14.20 and R14.70. That might seem wide, but with our currency, 50 cents is not really a heck of a spread. If we look at where we’re currently trading, then we [are] slap bang in the middle of that. So I think we’re in for a period of stability for the rest of the year, and if we don’t see any surprises out of the US and we don’t get any surprises out of South Africa – in terms of political scenarios, in terms of looting, etc. – I think we could have a fairly stable four months lying ahead of us going into the year-end.
On the possible scenarios in the US and SA that could impact the rand:
If we go into a full-scale war in Afghanistan, which I doubt – I think they will continue with the withdrawal of troops, I think there might be a strike here and there, another drone strike, but I don’t think they will go into a full-scale war. If they do, we will have a risk-off scenario throughout the emerging market space and we could breach the 15 levels. Similarly, if we have an announcement by Mr Powell that there is going to be interest rate increases much sooner, that will strengthen the dollar [and] that will also possibly make us breach the 15 levels. The same with our local situation – if we have a full-scale looting scenario again, we might breach the 15 level again. I do see that it’s fairly contained and very unlikely to happen, but those are the scenarios.
On how commodities affect the rand:
Well, we are a commodity country. It forms a very, very big part of our exports. It forms a very big part of our economy. If commodities move in an easy space and in an upward trend, then South Africa will benefit from it, the fiscus will benefit from it because mining companies would make bigger profits. My thinking is that the world economy will continue coming out of the Covid-19 period; it will continue with growth. Growth will become more and more stable as we move ahead and that will create further and sustainable demand for commodities. So I do not think that we are under any threat or serious threats for the commodity space, and I think that will continue supporting the country’s trade balance figures and as I say, profits for mining companies and the fiscus benefiting from that.
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