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Rand recovers on back of lower US inflation

June witnessed one of the highest ever spreads in currency value changes against the US dollar, mainly due to the huge gap between the strength of the Brazilian real and the downward spiral of the Turkish lira.

Several key currencies gained ground against the greenback in June, including the Euro and the British pound, but the Japanese yen took another tumble, losing more than 3% of its value.

Signs of a selective return to a risk-on sentiment amongst fund managers were in evidence in June, with South Africa, Poland and most South American currencies strengthening against the US dollar. Brazil was the top performer, with South Africa in a commendable second place, gaining 5% against the dollar.

The rapid easing of producer price inflation (PPI) in the US represents one of the key reasons for the retracement of the dollar against the Euro and British pound. PPI is a leading indicator for consumer prices and the May reading of just above one percent may have sounded the death knell for the rate hiking cycle in the US.

Declining inflation has become evident in many countries, including South Africa, with the lower oil price having played a pivotal role in easing price pressures. The price of West Texas intermediate oil has declined by 40% over the past 12 months and sluggish world growth will probably lead to further declines in energy prices.

Any further easing of consumer inflation may pave the way for a lowering of the Fed Fund rate before the end of the year. Emerging market currencies that are backed by fundamental fiscal stability will inevitably benefit from a return to lower rates in the US.

Brics currency will remain a pipe dream

The huge divergence in the performance of the Brics currency values against the US dollar that occurred during June once again demonstrates the macroeconomic absurdity of this international grouping of countries, which is de facto simply an anti-American club. In the space of merely one month between 31 May and 30 June, the spread of the changes in their currency values against the US dollar amounted to 1,500 basis points.

The respective characteristics of the Brics member states with regard to the size and composition of GDP; resource endowment; level of economic development; interest rates; and fiscal parameters differ to such an extent that any efforts to establish a Brics currency to challenge the global dominance of the US dollar is doomed to fail. For example, South Africa’s GDP represents less than 2% of the combined Brics GDP, with China in the dominant position of almost 70% of the total economic output of Brics.

For the time being, the big three – the US dollar, the Euro and the British pound, will continue to dominate international trade settlements and, crucially, international central bank currency reserves.

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