A Contrary, And More Comforting, Explanation for the Rand's Fall [column]

THE rand has been one of the worst-performing currencies in recent months. In mid-December, the exchange rate was about R10 to the euro. Now it is about R12,50, an impressive dive in such a short time.

The conventional wisdom blames increased political uncertainty after the African National Congress's Polokwane conference, the Eskom debacle and falling growth indicators.

But an interesting study distributed by Alphen Asset Management takes a contrary view. The article (not endorsed by Alphen) was written by semi retired Barnard Jacobs Mellet investment strategist Piet van Schaik.

First, Van Schaik notes that the decline began in mid-January, some time after Polokwane ended on December 20. In fact, the rand strengthened a little early in the year. "Foreign investors were clearly not as concerned about the new president-in-waiting as South Africans were," he notes.

The rand started falling when foreigners turned heavy sellers of local equities. Between January 16 and 31, they sold a net R13,5bn of equities, R7,4bn of it on just two days -- January 25 and 28, he notes.

The Eskom crisis was unfolding at this point, but so was the subprime crisis. Merrill Lynch and Citi announced $10bn-plus losses, and the Fed was warning of a downturn in the US. On January 22, the Fed reduced rates by 75 basis points -- the largest one-day cut ever.

Foreigners may have been extracting their investments not because of what was happening in SA, but to cover losses elsewhere. If this is so, they could be back sooner than expected, which would lead to a more stable (and possibly stronger) rand. I mported inflation could fall significantly. The implications for interest rates are obvious, Van Schaik notes.