Cees Bruggemans – How low can the Rand go? Half fair value? R20 to $?

Source: Fin24 - By Cees Bruggemans*, 08/09/2015

I am getting serious questions this week whether with the Rand hitting
such weak lows, now is the time to repatriate money from overseas.
That`s akin to asking whether we are hitting the Rand bottom.


In 2000 to 2001 it took a while for certainty to get home that things
really were out of control for a while. With fair value at the time
about 6:$, that was our starting gate in early 2000, just as Trevor
was having a good budget under his belt and Tito sensing we were going
to get rewarded for it.



Instead, we were sold down river, at first entirely for reasons
concocted far away (commodities were declared a sell in New York, and
then you should know), but increasingly because some own
doings.

Things said and done, as much by Treasury as
SARB.



Nearly two years later, the Rand totally exhausted reached its nadir
at 13.85:$. In real terms, about half fair value.


How to explain that? It is simpler than you think. The Rand`s value is
determined (made) in foreign exchange markets, somebody selling,
somebody buying, and this in thousands of trades daily.


When those trading get a sense of a one-way street, created by events
and abetted by policymaker statements, as in 2000 to 2001, you can get
a funneling effect.



Funneling? Pressure mostly one way, with decreasing resistance and
increasing insistence, until finally everyone is sated, the
short-sellers with their stupendous paper profits, while increasingly
value is begging to be acknowledged.


For half fair value is still half fair value, at some point an
irresistible buy. And then when the policymakers make fewer damaging
remarks, and the global sell-side firestorm has died down, the brave
can come out of their foxholes and start to buy, in time reinforcing
the uptrend just as strongly as the downtrend had ever been.


By winter 2005, the Rand hit 5.60:$. Go tell it to your grandchildren,
if they aren`t bored by scary ghost stories.



How to explain it yet differently? My favourite is about summertime,
fooling around in the swimming pool. You take one of these chlorine
floaters and press it underwater. The harder and deeper you press, the
more resistance you can feel. When you let go, get out of the way, for
the darn things shoots straight into the air under the influence of
gravity and physics.That`s the Rand for you.



Is all this again playing today? It is a fair question with an
uncertain answer. Certainly the world has declared an awful lot a
sell. China, commodities, commodity producers, EMs, and especially
`fragile` EMs (that is EMs that don`t get it, who feel under-saving
and overconsumption and inadequate investing is a birthright, and
perennial budget and balance of payments current account deficits are
entitlements).



We are one of those on all counts. That makes us a sitting duck, as
the 100% Rand depreciation since 2011, starting at 7:$ and now at 14:$
tells you.


So there has been a lot of global context greasing our skids, and we
have done as much again ourselves, by way of our politics, our
fragility, our poor growth, our suspect junk status, and more such
good stuff.



Of late there have also been more SARB statements, where perhaps
simple silence might have been golden?

This business of having a rising interest rate trajectory, and then
everyone starting to question that, with inflation about to peak
because of silly oil base effects, and this in a really weak economy
flirting with recession status.



But over the past week more was added to this brew. Initially a
suggestion that SARB might step in if things got `disorderly` with the
Rand (never properly defined or understood but presumably you will
recognise it when you see it).



And then overnight the sudden suggestion that SARB would probably not
be buying Rand (selling Dollars), that a Rand depreciation can
actually be good for you (boosting exports, penalising imports,
supporting growth) and that pass-through to our inflation may not be
as automatic for a host of reasons (adequately explained in articles
past).



After which a pregnant silence. And presumably a few deep
breaths.



As a trader, with news like that, do you elect to sit on your hands,
buy or sell?



The evidence is that a few too many got into selling mode, reinforcing
their thinking of the past five years, after which the trend is your
friend. Open blue skies wherever you look. Miserable global context,
with China and America conspiring to keep it like that for quite a
while longer. Lots of pain in the commodity sphere, with producers and
other EMs hung out to dry. Our politics hardly inspiring, our growth
sliding, our credit holding (but junk beckoning?), and then this
open-door policy inviting renewed funneling.


When and where will the Rand bottom?
I don`t think anyone can tell you with a straight face. But if 2000
rules apply, and fair value is say R10, then Xmas 2001 equivalence
would be… 22.50:$… by end 2016? That would be painful.



If 2000 equivalence doesn`t apply, and things are less bad and
intense, the Rand bottom could by all means be <22.50:$. How much <
would depend on how less intense. Of course.



On the other hand, if we were to have to note that the situation is >,
well then, your guess is as good as mine as too how much > before the
chlorine floater finally starts its way back to the surface to hit the
fan.



Now a serious question: how < or > do you think we are? And where`s
the bottom? I too would like to know…



*Cees Bruggemans, chairperson, Bruggemans and Associates, Consulting
Economists