South Africa property news: Rand update

Country: South Africa

26 August 2009

With the World 2010 football championships fast approaching, demand for South Africa property is expected to strengthen over the next few months. However, when buying property in South Africa, it is essential that buyers’ take the currency exchange rate into consideration, as a fluctuating currency will impact on the purchase price.

It is for this reason that currency exchange specialist Alastair Constance of Mercury FX looks at the performance of the South African Rand.

The Rand
The rand is maintaining relatively tight ranges against its major currency counterparts. Against the British pound it has traded between 13.71 and 12.79 for the whole of August to date. Against the dollar it has traded at extremes of only 8.2219 and 7.7377. Whilst these ranges are still large compared to what other currency crosses might trade within, they are a far-cry from the ranges that we have become accustomed to over the last year. This is in part due to the relative calm in the financial markets and the seeming recovery of the global economy.

The global equity markets seem to be having a big effect on currency markets at the moment and with the FTSE and Dow Jones making new highs for 2009 there is renewed confidence in the markets. This has favoured emerging market currencies and prompted some analysts to put their money on commodity-linked currencies and higher-yielding currencies to appreciate further. One analyst suspects that as investor risk appetite improves, the dollar will be sold off as it is used as a funding currency to buy higher yielding assets. This should benefit the rand.

China is vital to the economic recovery and despite a large sell off in Chinese equities in mid-August that market has stabilised to support the shift into riskier assets. The Shanghai Composite Index was down around 20% at one point in August which unnerved global equity markets despite the SCI having risen around 90% already in 2009.

There are fears that Chinese bank lending may be trimmed and the investment community harbours reservations that the surge in equity markets around the world might be premature. Strong USA property data and Federal Reserve chief Ben Bernanke's comments that global recovery prospects 'appear good' supported a significant rally in US equities on Friday 21.08.2009. One major contributor then to future rand movements will be the equity markets so keep a close eye on them to assess whether the rand will continue to appreciate or otherwise.

If the global economic recovery does continue and the slew of forthcoming economic data from around the world supports that notion then commodity markets will also continue to rally as investors get positioned to profit from higher commodity prices and demand for such commodities increases. Copper has reached its highest level since September 2008 for instance and this commodity price appreciation is another strong factor affecting the rand. The higher commodity prices, the higher the rand's value.

Domestically, second-quarter gross domestic product figures from South Africa showed a smaller-than-expected contraction but otherwise provided little support for the rand. This may suggest that the worst of the recession, SA's first in 17 years, may now be over.

Statistics South Africa said seasonally-adjusted gross domestic product (GDP) contracted by an annualised 3% in the second quarter, in line with expectations, compared with a 6.4 in Q1. Manufacturing was the major drag on the economy which along with trade was down despite the SARB having cut interest rates by 500 basis points since December. The bank surprised the market by cutting again on 13 August by 50 basis points bringing the repo rate down to 7%. A majority of analysts now believe SA to be at the end of the rate-cutting cycle.

Key to future rand price movements against other currencies will be investor confidence in the global economy recovery. Interest rates are almost certainly now at the lows in SA so while investors will continue to buy rand-denominated assets seeking higher yields their continued buying of what are considered riskier assets will be contingent on the perceived health of the global economy. More confidence equals a stronger rand.

See Also: Currency, Marc Da-Silva, South Africa

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