A new, softer rand

[Syndyre]

Looks like everything we import is going to become more expensive, thanks to government intervention:

While there is no suggestion that intervention by the executive in the exchange rate would inpinge on the mandate of the Reserve Bank, Governor Tito Mboweni may be called on to interpret his mandate more broadly, a senior presidency official said.

Nice Doublespeak there!


http://www.mg.co.za/articlePage.aspx?articleid=299136&area=/insight/insight__economy__business/

 

[noxibox]

If the rand is a bit weaker, although I don't think it is really overvalued, but interest rates are kept low it could help finance business expansion, as well as local consumer spending, i.e. less money used on interest, so it can be spend on goods. It is ridiculous that we're paying higher interest instead of putting that money where it can create jobs. The only thing we need is to deal harshly with creditors who hand out credit to people who cannot afford it. When I applied for a credit card recently they offered me an insane credit limit - so high that if I used it up to the limit I'd struggle to recover.

I do think Mboweni should take the exchange rate into account when looking at the inflation rate.

 

[Sneeky]

The exporters are bitching, and the current account woes also play a role.
Net importers of raw materials (i.e me ) will be adversely affected by this though.

 

[Jongi]

As the country's economy is still mainly geared towards mining and manufacturing, a weaker rand is not a surprising target f the government.

 

[sox63]

There is nothing more confusing than hearing people debate the value of the rand.

I have a question regarding the interest rates. If they are high, does it not mean a investor can get more his/her money in the country and thereby encouraging foriegn direct investment? If I was overseas and heard of +/- 12% interest for my money, I would just stick it in a SA bank.

Or is that just too simple?

 

[Syndyre]

There is nothing more confusing than hearing people debate the value of the rand.

I have a question regarding the interest rates. If they are high, does it not mean a investor can get more his/her money in the country and thereby encouraging foriegn direct investment? If I was overseas and heard of +/- 12% interest for my money, I would just stick it in a SA bank.

Or is that just too simple?

They can but this type of investment is generally unpredictable and can lead to a volatile currency because at the first sign of trouble people pull out their money, as its usually in a liquid investment anyway.

 

[Syndyre]

The exchange rate probably should be a factor I just think that any sign of government intervention might start to make investors jittery.

 

[air]

believe it is called the 'carry trade', where you take advantage of the interest rate differentials between countries. As mentioned, it does help to have a stable currency, but the rand can sometimes be a tad too volatile. Japan has had a very low interst rate for a coupla years now (0% ???) and people have been borrowing yen to put into other high interest currencies.

 

[Jongi]

Yeah it is called the carry trade. But the carry trade is also dependent on the perception of stability with regards to the currency. if the currency is volatile, you could lose all the interest you earned by the exchange rate moving against you in a flash.

 

[noxibox]

The exchange rate probably should be a factor I just think that any sign of government intervention might start to make investors jittery.

Government intervention of some kind is pretty standard. It is the type of intervention that can make investors nervous. A weak currency could encourage hard investment because products can be developed more cheaply in South Africa. Low interest rates can encourage expansion on both the production and consumption sides. One problem we were facing was that consumption was expanding faster than production, and inflation started to climb.

I have a question regarding the interest rates. If they are high, does it not mean a investor can get more his/her money in the country and thereby encouraging foriegn direct investment? If I was overseas and heard of +/- 12% interest for my money, I would just stick it in a SA bank.

Yes, people do this and it tends to boost the currency, so it can be counter-productive to have high interest rates if your goal is a weaker currency.

We don't really want people to just dump money into local bank accounts. We'd much rather have real investment in businesses that provide employment.

If we are going to try to maintain a particular currency exchange rate is there any way to just target the Rand-Dollar rate. Our currency has maintained a fairly weak level against the Pound and even the Euro, but the Dollar itself is weak.

Economics is hugely complex. No-one understands it yet and no-one is able to make accurate predictions. It is easier to predict the weather.

 

[Jongi]

Yes, people do this and it tends to boost the currency, so it can be counter-productive to have high interest rates if your goal is a weaker currency.

This is very much dependant on global liquidity. If as is the case now, there is global liquidity then those who invest money will look for homes for the cash in all sorts of assets and high yielding ones will find flavour as you state.

However if you go back to the start of this century, countries which were increasing rates were punished as that was seen as hurting the growth prospects of that country. This was before the Fed cut rates to its lowest levels alongside the zero levels from the BoJ.