Oil price creating volatility – economist

2014-12-19 14:30

The low oil price should be a positive for the rand and South Africa, but in the short-term was creating substantial global financial market volatility and negatively affecting the rand, an economist has said.

Rand Merchant Bank currency economist John Cairns today said the oil price drop was due to demand being weaker than expected this year, combined with higher than expected supply.

The Organisation of the Petroleum Exporting Countries cartel was also unwilling to cut production.

This had consequences for the Russian rouble, which had lost around half of its value against the US dollar this year.

“On Tuesday, the rouble came under pressure, trading at a low of 58 to a high of 80 against the US dollar. That range would be equal of the rand trading from about R11 to R15 to the dollar,” said Cairns.

“Even then, when things have settled down, it’s still trading at what would be equivalent of changes of around R1 a day to the US dollar. It’s immense volatility.”

The rouble’s fall, precipitated by the political tension in the Ukraine and resulting sanctions, negatively affected the rand.

“There is very little direct connection, but again what’s happened in the fall-out in the rouble has created substantial global market volatility, which has impacted negatively on the rand,” Cairns said.

“It has also raised questions in the sustainability of the emerging market trade. We are seeing large capital being withdrawn from the emerging market trade.”

An underlying worry in financial markets was when the US Federal Reserve (Fed) would start tightening monetary policy.

“The statement from the Fed on Wednesday evening, following a meeting, was less hawkish than expected, which provided some relief to the rand and other emerging markets,” Cairns said.

He believed the market was concerned the rand could weaken further next year.

“Fundamentally, we believe the rand has been oversold and should start appreciating.

“Fair value would be around R10 to the US dollar, but it’s important to raise that South Africa needs an undervalued currency at the moment, due to our large current account deficit.”

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