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Strategies & Market Trends : Natural Resource Stocks -- Ignore unavailable to you. Want to Upgrade?

To: rrufff who wrote (19982)	1/12/2005 8:42:34 PM
From: CuriousGeorge	Read Replies (1) \| Respond to of 108623

Heinz on the Rand for all you DROOY bottom fishers worldmarket.blogspot.com THE RAND here is a repost of comments i made regarding the Rand on kitco: here is why the Rand is set to weaken further, and possibly a lot more than anyone now thinks possible: 1. SA's trade balance. South Africa has now a persistent large trade deficit since qu.1 of 04. this is highly unusual - SA's economy has been a net exporter for at least 5 decades ( with occasional exceptions, like now ) . 2. the SA yield curve. after having spent the better part of 2002 and 2003 in deeply inverted territory ( at one point the negative spread between the repo rate and 10-yr. yields was close to 400 basis points ) , the curve has widened dramatically , by almost 500 bps. to its current positive 100 bp. spread. the inverted curve is a sign of extremely tight monetary policy and has been a decisive factor in producing Rand strength. this prop has been kicked away. 3. credit and money supply growth. after plunging close to 2% annualized in qu. 1 '04, credit growth in SA has resumed at a brisk pace. it is now close to 10% annualized, and the rate of change of this growth rate is quite steep. this has also brought annualized broad money supply growth to its highest level in 2 years at about 16% currently. more importantly, the trajectory is now UP, whereas two years ago the trend in the rate-of-change measures was down. with money supply growing at 16%, and the rate of growth on an accelerating trajectory, there is obviously no shortage of Rands. 4. SARB forex reserves. while the country's trade and current accounts have gone into deficit, the SARB's reserves have grown in almost parabolic fashion, more than doubling since early '04. there can only be one reason why its reserves have grown so much concurrently with a negative balance of payments: there must have been a huge influx of 'hot money' by hedge funds and other emerging market investors. by definition these are vulnerable positions, and since the Rand is not exactly a liquid currency, the coming outflow of these 'hot money' funds is going to exacerbate any potential decline. 5. interest rate spreads and inflation. since mid 2004, the spread between SA and US rates at the very short end ( SA's repo rate vs. the US FF rate ) has narrowed markedly, by 175 bps. while the spread remains quite large in absolute terms, it used to be even larger in the past. this spread is at least in part a risk premium SA must offer foreign investors. while one can't say for sure where exactly the threshold for the premium portion of the spread is, it is clear that a narrowing spread is not favoring the Rand. inflation: after having been in a strong down trend throughout 2003, PPI has recently reversed sharply from a negative 2.5% annualized to a positive 2% - a swing of 450 bps. CPI inflation has been far tamer, but has bottomed in the 3.8% region and has begun to head back up too. this reduces the real yield on SA debt securities further. again, it is unknowable where the real yield threshold is that causes hot money flows to reverse. but a threshold does exist. 6. the movements in the USD gold price , as well as other commodity prices ( e.g. coal and platinum group metals are also big export earners for the SA economy ) also influence perceptions about the Rand, but they are clearly not the main drivers. rather, since pricing of these commodities is in dollars, periods of dollar weakness tend to coincide with periods of commodity price strength. however, points 1. to 5. are more pertinent to the motivations of the emerging market funds that have driven the Rand to unsustainable levels. the emerging Rand negative trends in these backdrop conditions could result in a period of pronounced Rand weakness regardless of commodity price trends. of course, one must add that these weakening currency fundamentals are also emerging elsewhere - so the dollar is likely to not only strengthen vs. the Rand. thus a bout of Rand weakness could once again coincide with weakness in USD based commodity prices as well - but the cause-effect relationship is complex, and there will be leads and lags. it is those lead/lag periods when SA's mining industry is able to make money. addendum: i should point out that it's of course not yet certain whether the current downmove in the Rand is 'it' already - i would go as far as saying though that a medium term down move has a high probability of occuring. the fundamentals cited above have evolved to a point not in keeping with the currency's strength. this is not to say that it couldn't try to retest or even best recent highs after an initial corrective move - it has happened before after all. markets often move contrary to fundamentals for some time - and the fundamentals constantly evolve to boot. this should be seen more as a heads up - that in spite of the SARB's rather conservative policies over recent years, the market seems to have overshot in terms of the fundamental justification for the move. a closer look at the SA mining stocks follows in a forthcoming blog on the gold sector. posted by pater tenebrarum at 1:40 PM