R18/$ well within reach

2015-12-09 10:17

The local currency was trading at record all-time highs of R14.68 to the US Dollar today, bringing its 12-month rise to over 34%.

With the U.S Federal Reserve likely to begin its rate tightening cycle on 16th December, this is going to place even more pressure on the local currency as foreign investors are tempted to remove money from SA to get better yields in the U.S. To counter this, the South African Reserve Bank is going to be forced to follow suit and raise our local interest rates in tandem.

The U.S is going to be raising rates with the backdrop of a growing economy at full employment. We are going to be raising interest rates on the cusp of a new recession. Except for 2001, every Rand depreciation exceeding 30% preceded or occurred during an SA recession.

Past Rand crises exceeding 30% since 1985 (see below) have averaged 50% annual depreciation in the Rand/$ exchange rate. To reach this level would imply an exchange rate of at least R18/$ before this crises is said and done. This is not as outlandish as it may seem and is well within parameters of past currency crises.

Note how we do not sleepwalk into a crises – the Rand depreciates rapidly at an exponential rate before peaking. We are yet to experience full exponential depreciation in the Rand, but clearly from the chart one can see the exchange rate starting to go exponential.

UPDATE : Less than 6 hours after this posting, the Rand collapsed to a peak of R15.30/$ on the back of the sacking of the current financial minister by Jacob Zuma. Like a bug looking for a windshield, the Rand was looking for any excuse to embark on an exponential rise. Now it has one.

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