SUNDAY TIMES - Is it a currency, or an unguided missile?
Sunday Times Opinion By Bruce Whitfield, 2017-03-19 00:00:00.0

Is it a currency, or an unguided missile?

'Don't give advice," my late grandfather would counsel. "Wise men don't need it and fools won't take it." As advice goes, that is pretty good, er, advice.

The most commonly asked question in my e-mail inbox right now is: "Where is the rand headed?" Anyone who gives advice on the currency is bound to be left feeling foolish. Forecasting exchange rates is like forecasting the weather. You might get it right occasionally, but trying to do it with any level of certainty beyond a week is insane.

The currency market sees no shortage of speculators, charlatans and snake-oil salesmen pretending they can predict the future. It's spawned an entire industry of software sales all claiming to give you the edge over others in a frenzied market that sees some $5-trillion (about R64-trillion) of foreign exchange trading a day. The rand is the 20th-most traded currency in the world, making up about 1% of daily volumes, 80% of which is with the dollar. More than half of daily trade in the rand happens outside South Africa, primarily in the UK.

But it's a mug's game.

It might seem logical that as US interest rates rise the yield on money invested in US treasuries becomes more attractive, and "higher-risk" emerging markets less so. US rates did rise this week, and further increases are in the pipeline. And the rand, along with a basket of emerging markets currencies, strengthened. Go figure.

It requires invoking the spirit of Donald Rumsfeld, who, when the US invaded Iraq and searched fruitlessly for nonexistent weapons of mass destruction, said: "There are known knowns. There are things we know that we know. There are known unknowns. That is to say, there are things we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know."

Although he was ridiculed at the time, he was making a pretty profound statement on uncertainty and, by extension, the nature of currency markets.

A retired executive confessed to me that he was panicked into using his full foreign exchange allowance in the weeks after Nhlanhla Nene was fired as finance minister and the currency collapsed to its worst levels yet. I asked him whether he'd learnt nothing from 2001 when there was a severe collapse in the currency, followed by a marked recovery. His response: "It's different this time. There's no way it's coming back."

But the rand is nearly 40% stronger today than it was at its weakest point in January 2016.

Why do those who you think should know better keep getting it wrong?

Go back a step. Re-read the Rumsfeld quote and insert it here.

There are countless myths around the rand.

One of them was that a weaker currency would improve exports, allow manufacturing to be competitive and, most importantly, create jobs. We know now we can chalk that one down in the "fail" column. The destruction of confidence and the spike in inflation far outweighed any potential benefits.

Those who assume the rand is a one-way bet are right. Over time the currency does weaken, on average by about 6% a year because of the inflation difference between our economy and those of our biggest trading partners. But that steady decline is dotted with periods where we see extraordinary volatility, after which there is usually a retracement and a period of calm before the next shock.

What do we need? Simple, really. Growth-positive policy certainty. Call it radical economic transformation, if you like. The sort of transformation that encourages and welcomes investment and the optimism and predictability that the creation of new jobs provides.

Once we get that, then I might just consider disregarding my grandfather's wise counsel. Until then, please don't ask which way the currency is going.

Whitfield is a public speaker on the political economy and an award-winning financial journalist and broadcaster