David Gracey

David Gracey

David Gracey

Head of Foreign Exchange and Fixed Income Trading

Currency Comment: What is going on?


Equity markets the world over have been super buoyant. The DOW for example has climbed back from its low point of about 18 000 to currently trading close to 26 000 - a rise of close to 45%.

The dictionary defines exuberance as follows:
Exuberance (noun): the quality of being full of energy, excitement, and cheerfulness; ebullience.
I have not written a ‘normal’ comment for some time now. This is partly due to lack of motivation! Corona blues is a real thing (I’m going to write a song), and partly because to the fact that I have been battling to understand what is going on. Let me try and give you a few examples of what I mean:

  • Equity markets the world over have been super buoyant. The DOW for example has climbed back from its low point of about 18 000 to currently trading close to 26 000 - a rise of close to 45%. Does this make any sense in a country where +-30 million people have recently lost their jobs? Now I know that Trump is doing everything to re-open the economy as soon as possible, but does it make any sense that the DOW is only some 3 000 points off its record highs set earlier this year?
  • Of course one has to factor in the glorious amounts of monetary and fiscal stimulus that have taken place but, even so, this smacks of what former FED chief Alan Greenspan used to call irrational exuberance [with apologies to Greenspan].
  • Even as the civil rights riots have gripped large parts of the U.S., markets have continued to power ahead!
  • Even as China/U.S. relations continue to deteriorate, markets continue to power ahead!
  • Even as companies enter bankruptcies on an unprecedented scale, markets continue to power ahead!
  • Another example is EM currencies – it’s not that long ago that these currencies were being smashed to record lows but, in this return to risk markets, these high yielding currencies have made back an impressive amount of lost ground.
  • The rand, for example, has recovered more than 200 cents from its weakest point at circa 19.2500 post Moody’s downgrade during the first stages of lockdown. This all while the lockdown has continued for another 60 odd days, adding immeasurably to SA’s economic woes.

And so on and on it goes…
All of this liquidity and monetary stimulus is finding its way into high yielding riskier assets, because earning zero or negative interest in your home country is not a compelling investment scenario.
To be sure, as demonstrated post the 2007/2008 crisis, the party can continue for some time. However, at some point the debt collectors are going to come calling. As every movie about gangsterism has ever depicted, they may arrive in a friendly and polite manner, but eventually they start breaking knee caps and heads.
In SA we owe a lot of money, and we keep approaching new lenders to help us. At some point we will have to have a chat with the debt collectors. It may be true that, while these lenders can’t generate returns elsewhere in the developed world, they may be happy soaking up positive returns in riskier markets. That is only until your ability to repay comes into question.
Therefore do not be surprised that we are hearing more and more about ‘Modern Monetary theory’ (google is your friend) in a country as debt strapped as ours. As the SARB pointed out recently, this is definitely NOT a good idea for South Africa.
We can enjoy the exuberance while it lasts, but we cannot lose sight of the rising risks – debt collectors are mean and demanding.
I have not forgotten that I still owe episode 3 of ‘purchasing power’. Perhaps when Liverpool lifts the trophy my enthusiasm (or exuberance) will return.
Comment and rates accurate as at 3 June 08h30.