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Quantitative easing and the Rand

by Sable International | Dec 02, 2013
  • We see a lot of rand volatility every day, and much of this stems from quantitative easing (QE) in the United States. Whenever the Federal Reserve hints that it may bring an end to QE, markets panic. This makes emerging markets, like South Africa, particularly volatile.
    sa-flag
    We can trace QE back to the global financial crisis of 2008. In an effort to stabilise the wobbling economy, the Fed procured an unlikely remedy: a cocktail of monetary policies aimed at wiping out borrowing costs by cutting interest rates and kick-starting QE. 

    E-cash 

    The Fed injected an increasing amount of money into its own economy by buying government and private securities on the market. This put liquidity (e-cash) into the system and stimulated lending by the banks. The problem is, this electronic money has no asset or physical backing, such as gold. Printing money increases supply and typically leads to the devaluation of the currency. How Robert Mugabe must have chuckled when the very economies (including the UK) that berated him for printing money started doing the same thing! 

    Being the global trading currency that it is, the dollar is still seen as a safe haven in choppy market conditions, to the extent that the devaluation of QE is countered by people who try to hold dollars when emerging markets experience turbulence.

    QE3

    We are now heading towards the end of QE3 (the third phase of injection since 2008). To date, $2.7 trillion has been added to the economy, with a further $85bn per month being used to buy US government debt as well as mortgage-backed securities. This is in an effort to save the US housing market from total destruction and prevent the impoverishment of  every US homeowner (tax payer and voter). It’s a policy that’s worked, as we now see buoyancy returning to the market, with new homes starting to be built again. 

    The housing and banking recovery has created some widespread positive sentiment, with only two million of the nearly nine million jobs lost since 2008 still not recreated. All markets are up to pre-crash levels and consumption is on the rise. 

    An end to quantitative easing 

    Unfortunately, because of the nature of QE, the markets have become addicted; a slow release would be less disruptive than an instant withdrawal. Like any youngster learning to ride their bicycle, at some stage the parent has to let go. And that’s where we are currently. The prospect of a small wipe-out is real, and it is concerning markets at the moment. 

    Will the housing market stop in its tracks? Will capital markets wobble again? Both are likely, and inevitable.

    Emerging markets

    Our bond market in SA correlates with the US bond market, which is presently volatile (explaining why so many funds are flowing out of the SA market and putting huge pressure on the rand). Emerging markets are also being hard-hit as investors lose their appetite for due to-lower- than-expected growth rates coupled with bond outflows. All in all, it paints a tough picture for SA.

    Who knows how well the US economy will perform once it stands alone without QE life support? If the Americans batten down the hatches and work their way through, we should see other economies following, and hopefully a more positive global outlook later in 2014. 

    In the meantime, brace yourselves for a rollercoaster ride with the rand, which not only gets knocked about by the effects of QE, but is also linked to Eurozone debt problems (not to mention its own internal economic imbalances). Throw in a bit of 2014 pre-election sentiment and we will surely be happier this time next year, although we may all be poorer (in USD terms that is!).

    Andrew Rissik is our Managing Director, Forex and International Projects, specialising in South African forex as well as other global channels. You can contact him on 021 657 2155, andrew.rissik@sableinternational.com.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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