RMB currency analysts are incoherent

Like freeman argued last week, there is a problem with bank economists. The same goes for bank currency analysts. Refer to that article for some background to see where we are coming from with this post. One line from it:

The problem with bank economists is that they get way too much respect from ordinary folk who don’t really know what’s going on, so their very poor understanding of reality is given an undue place in public discourse.

Perhaps we can back this article up and chip away at some of this respect. We bring your attention to a presentation from RMB’s FICC Research team. It is embedded below. On slide 7 of their show they say “After adjusting for inflation, USD/ZAR is strong but not unduly so.” On slide 8 after adjusting for “inflation and all currencies” they opine that “The ZAR is stronger than the average exchange rates this decade but not as strong as in 2005.” So RMB believes the Rand is not really strong by historical levels.

They then attempt to show that 1) high electricity prices and 2) rapidly rising labour costs are eroding export competitiveness, and suggest the only real way this can be addressed will be through a weaker Rand exchange rate. They do, however, acknowledge the benefits will be fleeting.

So, the rand is not that strong, but it’s too strong!

Off slide 13: “Various studies have found that SA exports are not very price sensitive…but rather sensitive to global economic activity.” Slide 15: “ZAR has had no discernible impact on local manufacturing.” So RMB confirms that the Rand has no discernible impact on exports and local manufacturing.

So, we need a weaker rand to make exports more competitive but the rand doesn’t impact exports!

On slide 19 RMB opines that “The strong ZAR might impact on exports over the longer term” but in the preceding slide they say that “our export performance has been quite adequate since 1998 despite the ZAR volatility.” This is a plain contradiction. RMB should have read over their slides before publishing.

I thought the impact was fleeting, now it’s long term.  Which one guys?

This is also where their argument fizzles out - a bit like the Lions in the second half of three quarters of their Super 14 encounters. After just showing that the Rand has had little impact on recent historical economic data, they delve into ways that policymakers (the SARB) could weaken the Rand. What follows are some 30 slides on how this can be addressed. As a reminder, and as we have stated before, Human Action reckons the SARB will turn to forex accumulation on a large scale to weaken the Rand, likely late 2010 or early 2011. We do not support this intellectually or otherwise, but merely note this is what we foresee taking place.

On slide 52 RMB again contradicts itself, this time regarding the negative impact that volatility is having on the economy: “We need to address the issue of ZAR volatility…because it is the most volatile currency in the world.” Yes, RMB, but you are looking at volatility SINCE 2008. Didn’t you just mention on slide 18 that “our export performance has been quite adequate since 1998 despite the ZAR volatility.”

After putting on their detective hats to investigate the issue of Rand volatility (“because reasons for this rise in volatility has not been studied as far as we are aware”, slide 54), RMB concludes on slide 55 that “If we want to stop the massive swings in the ZAR we need to bring down our inflation rate!”

Weakening the rand is inflationary, but we need a lower inflation rate!

The rand is a funny currency and it never pays to be too arrogant when trying to forecast it, but please, don’t believe bank research reports just because they have the logo of a big bank on it. Ask yourself how often they get forecasts right. Don’t be shy to refer to this Rand outlook from RMB FICC published in March 2009 when they were looking for a USD/ZAR of 10.50 by Q4 2009. They completely misunderstood the basics of a comprehensive currency prediction framework.

Rising consumer prices (RMB calls this ’inflation’) can only be controlled if money supply and credit growth stays completely flat, not if we’re meddling to weaken the currency. Although RMB doesn’t say it – perhaps because they don’t understand the mechanics or owing to ignorance which equates to unknowing deception (again refer to “the problem with bank economists”) – this is the only way ‘inflation’ will be brought down to a minimum (zero or even price deflation).

So, by the SARB doing a lot less (keeping money & credit growth stable), it will achieve a lot more (lower volatility, lower ‘inflation’).

RMB February 2010 How Strong is the ZAR and What Can Be Done About It