Spring ushers in new season of rand weakness

The currency's fall in the first three weeks of September has been precipitous, taking it back to levels last seen in July 2010, and reminding economists, miners, manufacturers and ordinary South Africans just how volatile the rand can be.

While the reasons are mainly external - the eurozone crisis, the demise of Greece, the dodgy US economy and a sudden abhorrence of emerging markets - the good and bad effects of the sharply weaker rand will largely be internal.

Simply put, exporters are smiling, importers are not. An importer who does not have forward cover could go under on the currency's massive turnaround. Anyone who got complacent with the rand's period of respite between 6.50 and 7.00 to the USD could be in trouble today.

Worryingly, despite a slight pullback to 7.65 from Monday's 7.72, currency watchers such as Rand Merchant Bank believe 8.00 to the greenback could be possible within the next week or so as foreigners continue to dump bonds and equities and return to the strange safety of dollar denominated assets.

Despite the US' moribund economy and its gargantuan deficits, the world still moves back to the greenback in times of uncertainty.

Like a drug addict, it returns for a dollar fix before it can brush up the courage to go cold turkey again in international markets that currently appear to pose more risk than offer reward. Like it or not, the dollar is still the world's reserve currency and is likely to retain that position for quite some time to come.

But back to the pros and cons of a weaker rand. Before assessing this, it is worth noting that between May 1 and September 16, the rand averaged 6.88 against the dollar with a low of 6.56 and a high of 7.48. It ended August at 6.99. The currency's plunge in September could be a game changer for the economy.

Although gold is only a smaller player in the modern South African economy, it's worth looking at the exchange rate effect on gold miners' income stream.

On March 2, gold bullion was at $1,432 an ounce and the rand was at 6.94. A kilogram of gold fetched R319,512. Today, with gold at around $1,789 and the rand at 7.65, a kilogram of gold fetches around R440,000.

Not surprisingly, gold stocks have been big movers in recent days. Even little DRDGold, hardly an institutional favourite, has jumped by 20% since late August. The JSE's gold index jumped by 5% on September 19, underpinned by the rand's 3.1% slide against the dollar.

Mark Cutifani, AngloGold Ashanti's impressive CEO, said at the weekend that he sees the gold price hitting US$2,200 an ounce some time next year. That could sharply boost profitability for the group's South African operations and for those of Gold Fields and Harmony which have more local exposure.

Well known economist Iraj Abedien has for some time been urging the government and the Reserve Bank to intervene in an attempt to weaken the rand, stimulate the economy, and create jobs. As an adviser to the 26-member Manufacturing Circle, he said in May that the rand needed to be in the 8.00-8.50 range against the dollar. It was around 6.75 when he made his plea. It looks like he might just be getting his way without any intervention taking place.

His major premise was that SA's interest rates were too high in relation to the developed world where rates had been cut to near zero. With the manufacturing sector accounting for around 16% of GDP, he has consistently argued that a weaker rand would result in more competitiveness for local manufacturers.

At the same time Abedien was calling for some sort of intervention; Finance Minister Pravin Gordhan said government would not intervene, despite the rand having strengthened more than 30% against the dollar since the start of 2009. He said that the stronger rand was helping to cushion the impact of higher fuel and food prices.

Significantly, the cushioning effects of the stronger rand have now materially reduced and inflationary pressures are mounting in the economy driven by food prices, fuel heading back to record high levels and above-inflation wage demands.

Oil is SA's biggest and most expensive import amounting to the equivalent of around 300,000 barrels a day. The rand's recent plunge means that oil imports are going to cost much more without event taking the oil price into account.

Econometrix's Tony Twine warned back in April that exporters, trade unions and various industry players might not be so keen for a weaker rand if they carefully studied the hugely pervasive and inflationary effects of higher crude oil prices on the local economy. He stressed that the multiplier effects of higher oil prices "are major and should never be underestimated".

Motorists feel the pain of higher fuel prices at the pump, but the entire economy feels the pinch of higher crude prices, not only through higher freight charges, but also through more expensive lubricants, petro-chemical feed stocks, bitumen, dyes, waxes and a range of other products.