The announcement that deputy Governor Lesetja Kganyago will succeed outgoing Reserve Bank governor Gill Marcus in November was well received by the markets, with it being the first time in over two decades that someone has been appointed from within the bank.
Kganyago was quick to say that he will not disappoint, and that the primary objective of the SA Reserve Bank was to "protect the value of the rand in the interest of balanced and sustainable growth."
While this sounds good, especially at a time when the Rand is at such weak levels, does this mean that our new Governor believes he can tame the Rand?
We do trust, as having been mentored within the bank, that he has learnt the good as well as the bad lessons in the Central Banking for Dummies Handbook.
While "protecting the value of the rand" is the mandate of the Bank and has been for many decades, unfortunately, it is a misnomer, and based on a false belief that Central Banks can control the market - when history has shown just the opposite...
- Ask former governor Chris Stals, who wasted over $21bn to try and protect the Rand's value around the time of the South East Asian crisis in the late 1990s.
- Or ask Tito Mboweni, who announced in 2001, after all attempts to protect the Rand's collapse had failed, that the Bank would no longer be intervening in the currency market - that he would 'let the market determine its value'.
The fact is - the market is in control of the market, not any Central Bank.
But you may ask - "What about interest rates? Surely this is a lever that is in the Bank's hands…"
Yes, that is widely believed, but the facts tell another story.
Click to see full size...The above Chart, which dates back to 1999, shows the 3-month Treasury Bill yield against the Repo rate. As can clearly be seen, when T-bill yields have risen, SARB has been forced to raise rates. When they have peaked and start falling, SARB has dropped rates, and has had to follow the market all the way down.
And as can be seen, when SARB raised interest rates last year after holding them at record levels for so long, guess what? The market had already told them this needed to be done by bidding Treasury yields higher.
Pretty revealing stuff, isn't it!?
Revealing, yes, but very much in line with what actually drives all markets.
The market is in control, but what is the market?
It is merely a reflection of the mass psychology in that market.
This is what dictates the market, and there is nothing that any government or Central Bank can do - except to react.
Fortunately, these patterns of sentiment repeat themselves, which gives us the ability to predict future movements with some degree of probability, as is evidenced by the chart below, show some major calls on the Dollar/Rand since 2005 (more details here).
Click here to enlarge...Having this objective view can be critical, especially when the market is moving, because we tend to be swayed by general sentiment, which is more often wrong than right - especially when a trend is close to completion.
As always, would appreciate your feedback and comments below.
To your success~
James Paynter
P.S. And if you are exposed to Rand currency fluctuations, and are feeling frustrated by the Rand's wild movements, let us assist you by giving you up-to-date forecasts so that you can better time your transactions, and save yourself time, money, stress and effort. Go here for details.
