Explaining rand 'strength' to the non-economist

I thought I’d throw a couple of quick charts into the mix for those folks who have a life and don’t sit in front of reuters and/or bloomberg terminals all day. This should help make it clear why the Rand has been resilient against industrialised currencies of the world, the US dollar, Pound sterling, and Euro – despite a big budget deficit the SA government intends to run from 2009-13, despite the levels of poverty in the country, despite the high levels of crime, despite the rising unemployment, despite the current account deficit, despite the ridiculous comments of some of our brightest politicians. Oh and yes, despite the ridiculous forecasts of some of our ‘brightest’ economists, who have been continuously forecasting a weaker Rand of around R8.50 to the US dollar by this time of the year. If one regards these reasons I just mentioned as proof that the Rand needs to trade at weaker levels, we could just as well say the Rand should be stronger because the Springboks won the World Cup and currently holds every single rugby union trophy worth winning this year. 

For the most part, the current Rand ’strength’ is a function of money printing by the central bankers of industrialised nations, who have debased their currencies relative to other currencies that have not been debased. The economic reasoning is simple: an increase in the supply of a currency, all else equal, must lead to a lower exchange value relative to a currency or commodity that has been left in relative fixed supply. Although this is a simplification for brevity, this is the causal relation for the current level of the Rand.

In the first chart below, the Rand (black line, scale on right) is plotted against the price of brent crude oil. See how the value of both the Rand and oil is going up in terms of dollars? Chart runs from end-’08 to Nov ‘09.

Update: Apologies for poor quality of charts, will ensure they’re better in future. Just take note of trend rather than exact levels or percentages appreciation.

Note below the level of the JSE All Share Index and the Rand. Green line is the Rand (on left scale) and gold line the JSE Alsi (in rand points). Chart from end-’07 to Nov ‘09.

Here is the Rand (black line) overlayed on the gold price (in USD, grey line). Chart from end-’08 to Nov ‘09.

Below is the Nasdaq (red candles, scale left hand side) and the Rand. The Nasdaq is one of the three major stock indices in the US for those who don’t know. Chart from end-’07 to Nov ‘09.

What do all these asset classes have in common you may ask? Simply, they are not being printed or increased at the same break-neck speed as are industrialised countries’ currencies in order to support failing financial institutions and bankrupt governments. You might be thinking how money printing will create jobs and see to prosperous, wealth creating economic growth worldwide; and if you’re thinking it won’t, you’re right on the money.

What is concerning, however, is that the Rand is also going down against commodities like gold, oil and silver, which means the SA government is also debasing the value of the Rand (i.e. printing money), albeit it at a slower pace than western currencies. What could become even more concerning is that when the SA government must pay for their borrowings over the coming years, they decide to do it by not raising corporate or personal income taxes because the economy is still too ‘weak’, but rather they resort to the printing press. This is inflation: an increase of the money supply, and it will hurt the value of the Rand, particularly relative to commodities.