Why the rand is starting to wear its underpants outside its trousers
- Despite our volatile politics, the rand has seen a strong rally.
- It is now at its best level in more than 5 months.
- And a comparison between burger prices in New York and South Africa shows it is due to strengthen even further.
- Unfortunately, that indicator doesn't mean much.
- For more stories, go to Business Insider SA.
The rand has powered to its best levels against the US dollar in 5 months, breaking through the R14/$ level this week – more because the greenback is weak than the rand is strong. Either way, your global buying power has improved substantially and if The Economist’s Big Mac Index is any indicator, the rand could be poised for even greater gains – but only if SA’s damaging domestic political issues lose prominence.
Burgernomics, the price one pays for a Big Mac in the US vs other countries in the world, was all started as a bit of a joke. But it has taken on a life of its own as it demonstrates what you can get for the price of an American Big Mac in other parts of the world. It’s an example of purchasing power parity where one uses the US dollar as base currency and compares a commodity in the US to those around the world. The Big Mac ticks a lot of those boxes.
According to The Economist: “A Big Mac costs R31 in South Africa and $5.74 in the US. The implied exchange rate is R5.40. The difference between the actual exchange rate 14.18 (at the time of writing) suggests the South African rand is 61.9% undervalued.”
The reality is that there are a multitude of factors that contribute to the higher cost of a Big Mac in the US vs South Africa, with everything from property costs and labour needing to be considered. There is no way that it costs the same to produce a Big Mac in the US vs South Africa, but purchasing power parity is an interesting mechanism to use when looking at relative values and there are few commodities as universal as the ubiquitous Big Mac.
Why has the rand bounced back?
With one or two minor exceptions - including the EFF’s amateur theatrics in parliament, a strategy the party increasingly resorts to when it cannot get the law or logic on its side - there has been more than the usual dose of good news associated with South Africa of late.
The market has responded positively to reports that the Public Investment Corporation wants to convert $6.4 bllion in debt into equity in Eskom, plus have a say over who manages that utility. The fact that the president saw fit to accelerate the announcement that he was reappointing Lesetja Kganyago to another term as Reserve Bank governor, is also seen as a positive.
But the biggest factor is the US decision that the next move in its rates will be down. The US Fed Chairman Jerome Powell strongly suggested a rate cut was on the cards as early as the end of this month.
With the rand strengthening and local inflation also still in check, a small rate cut, possibly the first of several this year, must be on the cards.
Of course, there remains a risk of a ratings downgrade by Moody's which could cause a further dislocation for the currency. And our politics remain as toxic as ever as the EFF looks for new targets and resorts to near-physical violence in parliament, as it looks unable to pin spurious allegations on senior ANC figures. This means that the environment is hardly conducive to a stable outlook and thus undermines growth efforts.
Still, the Big Mac Index maintains the rand is nearly 62% undervalued. It’s the third most undervalued currency out of more than 50 in the experiment.
But even the magazine warns Burgernomics was not ever supposed to be taken seriously – it was really designed to make exchange rate theory more digestible.
Bruce Whitfield is a multi-platform award-winning financial journalist and broadcaster.
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