Market panic sends the rand to six-year low

(Article at www.busrep.co.za by Ethel Hazelhurst)

Local currency falls to nearly R10.90 to the dollar before recovering to close at R10.486 October 17, 2008

Renewed panic sparked further falls in already devastated global stock markets yesterday and sent the rand tumbling to its lowest level since October 2002. The currency was worth less than 10 US cents, having reached a low of nearly R10.90 to the dollar at 8am.

Chris Hart, the chief economist at Investment Solutions, said the currency was at its weakest ever on a trade-weighted basis because its performance against the euro was even worse than against the dollar.

“It was about R12 to the euro at the end of 2001 and it is now trading around R14.50,” he said yesterday morning.

After the terror attacks on New York and Washington in September 2001, the local currency depreciated sharply.

By December 19 that year, it closed at R12.45 to the dollar.

Brigid Taylor, a currency specialist at Rand Merchant Bank, said the sharp fall in the rand’s value yesterday came in thin markets “where any trade moves markets aggressively”.

The rand’s losses create the possibility of interest rate rises rather than the cut that was widely expected between December and next June.

Stock markets, commodities and emerging market currencies have suffered serious losses after the publication of poor economic data in the US. Taylor said: “After three weeks of horror in the financial markets, investors are looking at economic fundamentals in the US and asking: ‘How long will a recovery take?’.”

With no indication of how serious a recession might be, markets were expecting the worst. The Morgan Stanley Capital International Asian index fell 8.5 percent, “the largest drop since the measure was compiled in December 1987″, according to Bloomberg.

Japan’s Nikkei 225 stock average fell 11 percent. The agency further reported that the Reuters/Jefferies CRB index of 19 commodities fell 4.5 percent to the lowest since February 10 2005.

However, as the global trading day progressed, stock market losses were more subdued. The JSE all share index fell 2.31 percent. European stock markets also ended down.

The rand was not the only currency to take huge losses. Dennis Dykes, Nedbank group economist, said the currencies of Australia, New Zealand, Iceland and Turkey - all of which have large current account deficits - also suffered.

South Africa’s deficit - the shortfall between revenue from exports of goods and services and the import bill - was equal to 7.3 percent of gross domestic product in the second quarter. Like other countries that have been funding their current account deficits by attracting investment from abroad, South Africa can no longer depend on these flows because of the current financial environment.

The recurrence of panic yesterday followed strong rallies early in the week, after several governments and central banks announced the latest in a series of rescue measures at the weekend.

Ian Cruickshanks, the head of strategic research at Nedbank Capital, said the reversal in sentiment came as investors realised “bad loans still have to be written off and bank confidence has to be restored, which could take a long time”.

He said comments from Federal Reserve chairman Ben Bernanke could have contributed to the selloff. Bernanke referred to the threat to the US economy from “paralysed credit markets”.

The reluctance of banks to lend money will seriously weigh on economic growth in the years ahead.

Cruickshanks said there was no chance of a “V-shaped” recovery in the US economy - an immediate return to growth. He predicted it could take a decade before global confidence recovered.

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