Every day I’m left scratching my head as to the reasons for the relative strength of the ZAR over the last few weeks/months.
Regular readers will know that I’m am naturally bearish on the fortunes of our beloved currency, and heaven knows there are enough domestic reasons to feel this way. Reasons that have been around for the better part of a decade.
I do not need to restate here what these reasons are, I have pontificated frequently. On that front things deteriorate continuously as we have a government that is simply incapable of rectifying itself.
It is for that reason that I have a massive bruise on the side of my head from all the scratching going on when the rand strengthens.
HOWEVER, I have had an epiphany – and you may well ask why it’s taken me so long to come to this realisation, and you would be correct to ask because the answer is as clear as Perrier.
But it became apparent to me with the release of yesterday’s trade data – data that is released every month.
And every month for the last few years the data tells us that we export far more than we import. In fact the number has become big by any measurement. Last year the cumulative trade surplus was 450 billion ZAR. That’s a very lot.
Close to 30 billion USD a year, 2.5 billion USD a month, or about 120 million USD every day.
Why is this important?
SA’s historic current account and trade account have mostly always been in deficit. A net outflow of hard currency every month and year.
What this meant was that when the global macro environment deteriorated, the ZAR was vulnerable and would react negatively. Perhaps more negatively than was warranted for any specific event.
As a result, SA relied on so-called hot money. Money that was invested into the bond and equity markets. But this also meant that this money could leave easily when things got a little hairy – and therefore the ZAR was always vulnerable to a macro event.
The change in the trade cycle has altered this paradigm.
Every day now, new USD enter the system, and even when there is a macro event like an equity market blow out, or the FED raising rates unexpectedly, or bad news on the SA political/economic front- these USD remain in the system, and new export USD come into the market at regular intervals.
The kind of price action that we are seeing backs this up.
Some bad news comes out and the Rand reacts as expected. It will weaken and the market (including me) goes …”you see, South Africa is not a place that should have a strengthening currency”.
But tomorrow the bad news knee jerk reaction has dissipated, and the market finds itself LONGER of USD than was previously the case because exporters have taken advantage of the weakness, and then all those long positions can’t find new buyers, and the rand corrects to levels even stronger than before the event.
Now I am not saying that the ZAR is a one way strengthening bet. The domestic and international backdrop remains very important, and certainly, the domestic backdrop is not one that we would call “investor friendly”.
What I am saying is this ……we cannot ignore 30 billion USD of new inflow every year. And until the trade account swings into deficit, these flows will remain relevant.
When will the trade account swing?.......
That will take some doing. Either …
SA imports need to pick up significantly, and currently there is not much reason for that to happen – the economy remains stagnant, unemployment means that Joe Public does not have discretionary spend, and investment spend remains muted.
Or, the commodity super cycle needs to collapse. And that doesn’t look like happening whilst the global economy recovers and China’s economic policy remains supportive.
Add to this that as Covid lockdowns are repealed, we may see a resumption of offshore tourism and more hard currency entering the system.
As I say – it’s taken me a while to wake up – if I was my boss I would probably fire me. Luckily he doesn’t read this. (GULP).