South Africa

The big talking point this week has been the MPC’s shock decision to only raise interest rates by 0.5%. The general market consensus was for a hike of 1% with some even calling for a 2% increase to reign in spiraling ‘inflation’. I’ve put inflation in inverted comma’s not because I don’t believe that there’s an inflationary problem in SA but rather because the inflation that the government is trying to control through higher interest rates is an externally driven imported inflation that higher interest rates won’t even touch. I’m talking about rocketing oil prices, a significantly weaker ZAR .etc. These are the primary causes of the inflationary pressures in the SA economy and higher interest rates are going to have exactly the opposite to the intended effect. Trust me. I’ll be the one saying ‘I told you so’ at the end of this little mess.
 

By using interest rates to control externally driven inflationary pressures is just going to slow growth, increase unemployment, weaken the ZAR further, worsen the housing crisis, cause people to borrow more and ultimately increase the inherent credit risk in the economy.

I mean, I can’t be the only one who sees this but judging by the comments in the media from supposedly highly qualified, and might I say very highly paid people, I may in fact be one of the only people thinking along these lines. Which is good because the majority are always wrong. The next time you read a few similarly biased economic articles in the paper nodding your head in agreement – you’re probably wrong.

So the fact of the matter is that the current steeply rising interest rate is threatening to create a boiling pot of problems as described above. Most of the SA banks have dropped off significantly but seeing as though some UK property stocks dropped off 25% in a single day this week it may not be the worst idea to start looking further afield for the next stocks in line for a beating.

Anyway, so this is a forex report. USDZAR is back above 8.00 and GBPZAR pushing for 16.00 again.

The interesting thing about the 0.5% rate increase this week was that within a second of the announcement USDZAR jumped up around 12 cents, and GBPZAR about 20 cents!

I could write a good short book on why the ZAR may be heading significantly weaker but that’s neither here nor there. The major trend is without question up and it looks like this little shock to the markets coupled with the Zimbabwe story (which is increasingly moving towards only one possible solution) is pointing to a weaker ZAR within this major trend. I personally cannot see even one reason at the moment to buy ZAR except for the high positive interest rate differential in favour of holding ZAR. It’s as simple as that.

Remember though that you can earn nearly 10% extra interest on your money by holding ZAR as opposed to foreign currency so the ZAR needs to depreciate at least 10% per annum just for you to breakeven on your position or decision. So even though my personal feeling is that the ZAR will fall against foreign currencies it needs to fall at more than 10% per annum for you to actually make money from your decision. Make sense?

So at the end of the day there is actually value in both buying and selling ZAR, and the actual profit or loss from your decision is sometimes less than you think.

Good luck and all the best for the week ahead!

Please do not hesitate to call Exchange4free for any advice or foreign exchange related queries.

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