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A weaker rand and emerging market mayhem - that's what's on the cards this month

by , 04 February 2014

January was a difficult month for investors. Though several Developed Markets fell, the epicentre of the pain was definitely in emerging markets. This shouldn't have come as a surprise. I've consistently predicted trouble for emerging markets as Quantitative Easing began to end. That said, several emerging markets, including South Africa have decided to make the worst of a bad situation. Today we explore why and look at what we can expect from the market this week.

Let’s start by looking at emerging market Argentina. Last month, it decided to impose more exchange controls, in a misguided attempt protect its currency. This resulted in the Peso falling and the country was forced to reverse the law.

In India, high inflation caused the new Central Banker to increase rates and complain to the media that his counterparts in the developed world have acted rashly. As an economist, he should know that countries set their monetary policy to achieve internal targets and not to ensure that their neighbours prosper.

Turkey made a similar mistake. It has a leader who’s sacrificed decades of investor trust to protect his inner circle from corruption charges. In response to a rapidly depreciating currency, Turkey’s Central Bank took the extraordinary measure of raising rates from 7.75% to 12%. I’ve personally never witnessed a move like this in all my years in the market. It’s very audaciousness speaks to the level of risk that the country faces.

Follow the path of reckless emerging markets, is none other than South Africa’s economy

Finally in South Africa, we’re currently in the midst of yet another mining strike. Fortunately, we haven’t seen the violence of last year’s strikes reappear. But this hasn’t helped the rand.

It weakened to a five year low last month, prompting the South African Reserve Bank to raise interest rates for the first time in several years.

The fact that the rand hasn’t strengthened since the announcement may mean that we could see yet more hikes in the near term. Given the relative weakness of the South African economy, we may face a recession by the end of the year if emerging markets continue to fall.

What does the market have in store for global and local economies this week?

This Friday will be the first one of the month and that means only one thing: US Non-Farm Payrolls and Unemployment numbers will be released. I expect to see about 190,000 new jobs and for the unemployment rate to remain unchanged. The US has emerged as the strongest of the developed economies and I don’t expect this to change anytime soon. The US Fed is justified in reducing its extraordinary measures, despite the negative impact it has on Emerging Markets.

In local news, we’ll get some pretty significant releases throughout the week.

Yesterday, we saw the release of Kagiso PMI as well as NAAMSA Vehicle Sales. This gigure came in unchanged at 49.9. For some this is a surprise, but the weaker rand has made local production much more competitive versus international competitors.

Today, we’ll receive SACCI Business Confidence figures. Given the recent strike action and weaker rand, I’m not overly optimistic.

And finally on Friday, we’ll get Net and Gross Reserves. This number is indicates our ability to pay for imports as well as defend our rand. Pay attention to it.

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A weaker rand and emerging market mayhem - that's what's on the cards this month
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