Is the rand's decline overdone?

Is the rand overvalued in dollar terms? This graph, which compares the exchange rate for Australian dollars against the rand-dollar exchange rate, suggests that it is. The South African and Australian economies both depend on the exports of commodities, so it is not surprising that our currency and the Australian dollar have moved in tandem — until recently.

The divergence in the currencies in the graph suggests that either the rand is undervalued or that the Australian dollar is overvalued.

I am not foolish enough to predict any specific rate. I speak from experience. I once won a krugerrand for correctly predicting the rand-dollar exchange rate in a competition run by Standard Bank. Many years later, I won a booby price for making an outlandish prediction in that same competition.

Models do exist to forecast exchange rates but models sometimes don’t work. Yet comparison with the Australian dollar has proved informative in the past.

At the time of the infamous plunge in the rand against the dollar, which led to a commission of inquiry, many South Africans thought not only that the rand would never recover but also that it would fall forever (see graph, in US cents per rand, to show the rand’s decline). The rand rose above R13 to the dollar at one stage (that is, R1 could get you about seven US cents), and some predicted the rand would reach R20 to the dollar.

One economist who did not share in the pessimism — because, among other things, of a comparison between the forex values of the rand and the Australian dollar against the US dollar — was Jos Gerson, then chief economist at Merrill Lynch. His prediction of a rand recovery proved this methodology sound.

It wasn’t as simple as looking at a graph. I remember the real effective exchange rate, a useful but complex measure, being used.

As the rand heads south once again, having stayed for a while at less than R7 to the dollar, one must guard against excessive pessimism or groundless optimism.