In an article earlier this year ("Off-the-wall forecasts"), I looked at what the Rand was potentially facing, especially domestically, and concluded that these events could possibly lead to outsized Rand undervaluation, even well beyond 13:$.

So far this quarter I have had much time to repent at leisure, given the Rand's firming yet a plethora of shock events, globally and locally, against a backdrop of evolving Fed policy normalization and Chinese trouble in maintaining its financial stability and growth momentum.

For the Rand firmed back towards 10.60:$ rather than weakened beyond 12-13:$ or worse, as seen on occasion in the past under crisis conditions.

All of that should have sunk risky currencies again this time, too, especially EM (Emerging Markets) Fragiles, ten times over, or at least did so at moments in modern history looking vaguely similar in shock potential. Yet not this time (yet).

For it went wider than just us and the Rand. Specific event-exposed currencies (Russia) have been hit hard, but the further away residing from trouble zones, the less one has been troubled of late. And that with often extraordinary domestic challenges, SA not the least among these.

But then we had a few things going in our favour as well, understated perhaps, but still real.
Our main Rand shock collapses (1985, 1998, 2001) were marked by our own policy mistakes of some significance (either political or monetary) or were incited by remarkable global events (2008).
The truth of the moment? Our politics is remarkably "local", something some of us may vigorously contest, but which globalists take in stride. Even more important apparently, our macro policy managers (SARB, Treasury) are really not putting a foot wrong of late, and recognized as such.
And so the Rand depreciated in solid global EM company these past three years as European strains, Chinese stirrings and Fed policy repositioning did the talking, changing the global line-up, causing risky assets to become more differentiated once again, with in our case a further premium exacted for Marikana and subsequent mining troubles, but not excessively so.

In the process the Rand became undervalued after a long stretch of being heavily overvalued and bond yields were repriced, to the point of re-establishing their relative attractiveness. A couple of things than still had to be taken into consideration.

Despite what many locals may think, the global market place does not seem to consider us a basket case, having so many real basket cases to choose from.  At the core of our institutional fabric, there are many quality assets and managements, along with political stability and predictability. That counts in our favour qua sustainability.

So our labour environment, at least its key union aspects, may be chaotic at present, but the larger picture remains acceptable, suitably degraded in terms of risk premiums.

As to the bigger global backdrop, the big plus remains that Fed normalization proceeds exceedingly gradual, given the slowness of economic recuperation, despite the many naysayers.

As to other world events, it is with remarkable alacrity that markets this month did not quite write off Chinese and Russian events, apparently quite willing to stay the course, especially where risky assets were concerned, even if we have seen different in the past at crisis moments as to genuine panic as opposed to lightly brushing things off.

Can this last?
It will all depend on events as they play out.  Will US events remain very gradual, European events very benign, the Ukrainian play predictable, the Russian bluff controlled, Chinese correction manageable, the global markets in casual frame of mind discounting risk?  If so, and if our local situation has been correctly assessed, markets could remain supportive for our bond yields and Rand trading in 10-12:$ territory and holding its own this year even as other, especially troubled regions, are put through the wringer.

It is all very logical, except many of us have seen enough currency crises to distrust so much easy going casualness, still expecting a Rand dislocation north of 12:$ somewhere along the line, and not used to waiting in vain.

More Rand weakness is to be expected as Fed normalization proceeds, especially when it finally starts to lift interest rates, but as long as this process remains slow and orderly there will be no man overboard.

Only new shock events could put us again actively into play, rearranging our complexion. Yet the Fed and China seemingly remain our main change agents, all else merely fluff?
 
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website   www.bruggemans.co.za
Email   economics@bruggemans.co.za
Twitter   @ceesbruggemans