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Send  Share  RSS  Twitter  18 Sep 2014

ECONOMY: Will the Exchange Rate Survive Another Battering this Week?


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Just over a week ago, the rand was at R10.70/$ and R13.70/€ but they are now some 30c and 50c weaker respectively following the release of the disappointing current account data last week. But this week may prove to be even more calamitous, says Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation.

There is a faint possibility that the Federal Reserve may indicate an earlier likelihood of interest rate hikes given the relative strength in the US recovery while a yes vote in the Scottish referendum on Thursday may also roil markets.   Add to that, local inflation data due out on Wednesday so that the South African Reserve Bank (SARB) can digest it prior to their Repo rate decision on Thursday and this week has all the makings of a rollercoaster ride.

Fuel prices have benefited from lower crude oil prices in recent weeks (petrol stayed constant in August and fell by 67c per litre this month while diesel fell by 5c per litre in August and by a further 25c per litre this month) but the recent ZAR weakness has seen an under-recovery emerge on the fuel price front despite Brent crude approaching $97 per barrel. The MPC may deem it necessary to try and contain inflationary pressures from a weaker exchange rate, despite the weak underlying fundamentals of the real economy.  While a 25 basis points hike would hopefully be the worst outcome, perhaps a 50 basis points move will be considered, given the fact that imports are not slowing as fast as they should to improve the current account deficit to such an extent over the next quarter that a credit rating downgrade can be averted.

The jury is still out on the extent of deterioration in personal finances (the National Credit Regulator’s statistical report for the second quarter of 2014 is due out later this month) while businesses are grappling with power outages and lacklustre demand.  Obviously these factors will also be part of the Monetary Policy Committee’s deliberations but the SARB is not the cook of the stew that determines output in the economy. Our internal weekly adverse indicator has averaged 320 so far this year but spiked last week to 372 which may precede a rise in payment defaults.

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