SARB betting on a strong rand in 2010?

SARB Headquarters

The SA Reserve Bank (SARB) released the foreign exchange and gold reserves data for December today.  The value of dollar-denominated reserves fell quite sharply in December, but, after netting off the downward adjustment to gold reserves due to a lower gold price in December as well as the downward adjustment to dollar-denominated currency and SDR reserves due to weaker EUR and GBP reserves, the SARB did actually build reserves in December to the tune of about $90 million. 

So, ‘real’ forex reserves, if you like, did increase slightly in December, but a $90 million purchase of forex in the market by the bank is low by historical standards, especially when the rand has strengthened to the degree that it has. 

It is easy to understand muted buying of forex by the SARB during a time of rand distress (in late 2008 and early 2009 when the rand was getting hammered the Bank’s buying in the market plunged to effectively zero), but the rand has been one of the best performers of past year and, according to most policy makers including the former SARB Governor, is too strong.

So, if the rand is too strong, why were forex purchases so weak in h2 2009? 

To put it into perspective, from May 2007 to March 2008, the SARB monthly forex purchases probably averaged about $600 million, so the December intervention is small-fry. 

A few things worth commenting on regarding this: 

1) Firstly, the USD-ZAR jumped sharply up toward R7.80/$ during the month so it was not exactly a month in which the Bank saw great value in buying forex and it certainly wouldn’t have wanted to add any volatility to the rand weakness in a global environment when foreign portfolio flows can take flight on a whim.  The SARB would also not have wanted to bully the market in thin liquidity conditions in December. 

But hang on, November was a strong rand month and still buying was very small and if we look at December 2008 forex buying it was even higher than December 2009, even at a time when the rand was getting smashed and market volumes would also have been small. 

2) This leads us to believe that the “rand-is-too-strong” rhetoric by policy makers of late has not really permeated the thinking of the members of the MPC or the SARB chiefs in charge of forex buying programmes.  The SARB must hold a core view that a) accumulating USD, GBP and EUR is a bad strategic bet right now, and/or b) that the USD-ZAR will offer way better value for buying forex in the months ahead. 

In other words, the SA central bank is biding its time.  It knows the rand will get much stronger in 2010 and allow it to get far more bang for its buck in accumulating forex reserves.  As the USD-ZAR heads back below R7.00/$ and then moves toward R6.50 and R6.00, then watch the SARB ramp up its forex buying in the market, possibly to well over $1-2 billion a month. 

And that’s why, while CPI price inflation will drop in 2010, if history is any guide the SARB will make sure monetary growth ramps up quickly enough in the second half of the year to make 2011/12 the start of another inflation nightmare.