Saturday Open Thread: Marcus Holds Repo Rate Steady
It's the Saturday open thread. This week's topic - The Reserve Bank held the repo rate steady. How long will they do so?
10 comments:
Bean Counter
said...
Both economists interviewed on SABC said no to little change this year - so 500 point up by June?
Instead of wondering when and whether they'll move, perhaps it might be more valuable asking how much they need to rise to start a serious stream of forced sales. My feeling is that it will take more than we think.
An interesting aside: check out the household debt-to-disposable income rations around the world. Ours is about 78%, but we're not even on the map compared to most developed economies - Denmark at 300%, Holland at 250%, Norway and Switzerland at 150%, S Korea, Canada and US around 120%, even penny-pinching Germans at about 85%. I know living in a developing country brings other pressures and dangers, but over-indebtedness doesn't really seem to be one of them. Thoughts?
Some interesting trend changes have been happening during the last week:
1. Rand weakened after SARB didn't cut the rate. It seems that the theory that the Carry trade drives the Rand strength doesn't work anymore. Some articles say that foreigners are starting to dump SA equities and take the money out of Rand since they believe they are oversold.
2. Dollar weakened significantly against Euro in a matter of a few days. At the same time, gold weakened against dollar.
Below is a link to SA's debt to disposable income from 1969 to today, graph included. Notice the amazing jump between 2003 and 2006? This corresponds closly to the sharp rise in property prices witnessed during those times due to large demand. Inflation based off easy credit = bubble.
CSo the theory is that higher interest rates should support the currency due to the carry trade.
So Mrs Marcus keep the exchange rate unchanged and the ZAR devalues against theory.
It is rumoured and stated (in her speech) that she is buying foreign reserves. One wonders what USD, Yuan, Gold? One would assume USD(crazy as that sounds)
It is assumed that the Reserve banks action, the increase in Forex drives down the value of the ZAR. It is stated that "Bonds" were sold to finance the purchase of forex.
So if I understand this correctly SA is borrowing money to buy USD in order to devalue the ZAR.
The reason for this (roundabout way of doing things) is to counter act the effect of the carry trade.
I'm not an economist but it seems that this "Smoke and Mirrors" trick is to get the money into the central fiscus and effectively the same as printing money.
By just lowering the interest rate "should have the same effect" the money is put in the pockets of citizens that owe the money and not in the central fiscus.
If the objective is to cancel the effect of the carry trade is it not logical that the interest rate should be lowered, it seems that overindebtedness is not a major issue. From what I've seen more debt is now encouraged.
So to me this is a classic expample of please focus on this trick in my right hand while the left slips some money unseen out of your pocket.
The carry trade is the spread between interest rates, do the math here. Secondly the market is overbought, not oversold.
Here is an example of the concerns from a recent fund newsletter I read.
South Africa is a good example of an emerging market to avoid. There has been 3% growth – a product in part due to the World Cup. They have a strong rand coupled with a rising current account deficit. This is not America, the rand will devalue. The stock market went out on the highs of the year matching the 2007 highs. Something is not right
We have argued before that when there are international liquidity crises, the places that get hit worst and where correlations to volatility are highest are emerging markets that finance themselves via portfolio flows. (The stickiest kind of financing is Foreign Direct Investment, followed by bank loans, and then by portfolio flows.)We generally like emerging market currencies, but the South African rand is among our least favourite in times of crises. South Africa finances itself primarily via portfolio flows, and the level of portfolio flows today is as high as it was at its peak in 2007 before foreigners became net sellers in 2008. At the peak of the Lehman crisis,over 150 billion ZAR were withdrawn from South Africa. Also, USDZAR spiked before the VIX spiked and stayed high longer.
Shorting the ZAR remains one of our favourite risk aversion trades
Correct, easy money isnt it? Good old Trev and Tito, now all us South Africans pay corrupt banker and hedge fund bonuses.
And stocks as well, portfolio flows as in the above newsletter. The bonds that Froggy talks about are sold to sterilize the USD purchases so they do not cause inflation of our money supply. Disingenious as that is what they have done through the infrastructure stimulus; this money has now filtered through hence the pop in the M3 money supply figures.
10 comments:
Both economists interviewed on SABC said no to little change this year - so 500 point up by June?
Instead of wondering when and whether they'll move, perhaps it might be more valuable asking how much they need to rise to start a serious stream of forced sales. My feeling is that it will take more than we think.
An interesting aside: check out the household debt-to-disposable income rations around the world. Ours is about 78%, but we're not even on the map compared to most developed economies - Denmark at 300%, Holland at 250%, Norway and Switzerland at 150%, S Korea, Canada and US around 120%, even penny-pinching Germans at about 85%. I know living in a developing country brings other pressures and dangers, but over-indebtedness doesn't really seem to be one of them. Thoughts?
Some interesting trend changes have been happening during the last week:
1. Rand weakened after SARB didn't cut the rate. It seems that the theory that the Carry trade drives the Rand strength doesn't work anymore. Some articles say that foreigners are starting to dump SA equities and take the money out of Rand since they believe they are oversold.
2. Dollar weakened significantly against Euro in a matter of a few days. At the same time, gold weakened against dollar.
Below is a link to SA's debt to disposable income from 1969 to today, graph included. Notice the amazing jump between 2003 and 2006? This corresponds closly to the sharp rise in property prices witnessed during those times due to large demand. Inflation based off easy credit = bubble.
http://www.dti.gov.za/econdb/resbank/rb6525LK.html
CSo the theory is that higher interest rates should support the currency due to the carry trade.
So Mrs Marcus keep the exchange rate unchanged and the ZAR devalues against theory.
It is rumoured and stated (in her speech) that she is buying foreign reserves. One wonders what USD, Yuan, Gold? One would assume USD(crazy as that sounds)
It is assumed that the Reserve banks action, the increase in Forex drives down the value of the ZAR. It is stated that "Bonds" were sold to finance the purchase of forex.
So if I understand this correctly SA is borrowing money to buy USD in order to devalue the ZAR.
The reason for this (roundabout way of doing things) is to counter act the effect of the carry trade.
I'm not an economist but it seems that this "Smoke and Mirrors" trick is to get the money into the central fiscus and effectively the same as printing money.
By just lowering the interest rate "should have the same effect" the money is put in the pockets of citizens that owe the money and not in the central fiscus.
If the objective is to cancel the effect of the carry trade is it not logical that the interest rate should be lowered, it seems that overindebtedness is not a major issue. From what I've seen more debt is now encouraged.
So to me this is a classic expample of please focus on this trick in my right hand while the left slips some money unseen out of your pocket.
Anon 2,
The carry trade is the spread between interest rates, do the math here. Secondly the market is overbought, not oversold.
Here is an example of the concerns from a recent fund newsletter I read.
South Africa is a good example of an emerging market to avoid. There has been 3% growth – a product in part due to the World Cup. They have a strong rand coupled with a rising current account deficit. This is not America, the rand will devalue. The stock market went out on the highs of the year matching the 2007 highs. Something is not right
We have argued before that when there are international liquidity crises, the places that get hit worst and where correlations to volatility are highest are emerging markets that finance themselves via portfolio flows. (The stickiest kind of financing is Foreign Direct Investment, followed by bank loans, and then by portfolio flows.)We generally like emerging market currencies, but the South African rand is among our least favourite in times
of crises. South Africa finances itself primarily via portfolio flows, and the level of portfolio flows today is as high as it was at its peak in 2007 before foreigners became net sellers in 2008. At the peak of the Lehman crisis,over 150 billion ZAR were withdrawn from South Africa. Also, USDZAR spiked before the VIX spiked and stayed high longer.
Shorting the ZAR remains one of our favourite risk aversion trades
@Froggy,
Quite correct. Here is a video I watched recently which you might find interesting.
Why Governments Are Stupid
@Goldilocks, what newsletter was it? Pretty please?
Shayan click here
@Goldilocks
Just wanted to clear up - the carry trade is the spread between our interest rate and the US / UK / Japan "zero rates"?
And when you say overbought are you referring to the R50bn inflow into SA bonds over the last 12 months?
Thanks
Shayan click here
@JDog
Correct, easy money isnt it? Good old Trev and Tito, now all us South Africans pay corrupt banker and hedge fund bonuses.
And stocks as well, portfolio flows as in the above newsletter. The bonds that Froggy talks about are sold to sterilize the USD purchases so they do not cause inflation of our money supply. Disingenious as that is what they have done through the infrastructure stimulus; this money has now filtered through hence the pop in the M3 money supply figures.
Heres a good video I watched lately
Why governments are stupid
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