Opinion: Exchange rates in the news Reply

A lot has already been written on the meaning of Marikana, on Malema, Mangaung and recently Moody’s. MoneyWeb’s Felicity Duncan has a good article on the problems that South Africa has. Over the last two weeks the rand depreciated by almost 10 per cent and exchange rates are in the news.

This week The Economist argued that strong and stable currencies are out of fashion. The loose monetary conditions following the global financial crisis has meant that countries are content to let their currencies depreciate.

Propping a currency up requires a central bank to use up finite foreign exchange reserves; keeping one down just requires the willingness to issue more of it.

However, the article shows that the link between QE and currency is not mechanistic – the dollar remains stronger against the euro and the pound that it was when Lehman collapsed. Japan has conducted QE programmes at various times since 2001 and the yen is much stronger now than when it started. The article argues that maybe foreign exchange markets are operating differently: Low nominal interest rates in developed economies mean that there is less scope for carry trade and investors are looking at yield differentials in bond markets. But is QE a form of protectionism, or will it eventually lead to run-away inflation? On both counts the evidence does not seem to add up. Trade imbalances seem to have less influence on exchange rates and countries with higher inflation rates do not always have weaker exchange rates that keep their exports competitive – often their higher-than-average interest rates cause a carry trade that supports the currency. The article concludes that maybe foreign exchange markets no longer severely punish bad economic performance like high inflation or poor trade performance and governments can direct their focus to stabilising the financial sector and reducing unemployment.It makes for an interesting read.

But is this relevant for South Africa? I doubt whether one could argue that  inflation and the current account deficit do not matter for the exchange rate. And these forces are compounded by uncertainty and instability. Could exporters benefit from a weaker rand? In the current global slowdown this seems unlikely. And evidence shows that it may be case that exporters profit, but export volumes often do not benefit from depreciation. SA policymakers should take their cue from the exchange rate and ensure that a cost push does not become an inflationary process.

Waldo Krugell

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