20/09/2000 17:05 - (SA) Rand comeback chances fading

Mariam Isa

Johannesburg - South Africa's battle-weary rand struggled to hold firmer ground on Wednesday, as analysts warned its fate vis-a-vis the rampant dollar is still tied to the sagging euro.

Since the start of 2000, the rand has lost around 18% of its value against the US unit, mainly because of the rapid descent of the euro, the currency of its main trading partner.

It hit a fresh trough of 7.3270 to the dollar on Tuesday - a fall of nearly 2% in two days - but managed to cling to modest gains at around 7.27/$ for most of Wednesday, before sliding again to over 7.30 in New York, even as the hapless euro continued to hit successive record lows.

But with the European currency apparently going into free fall in the absence of concerted central bank intervention, domestic players say there is ultimately only one way the rand can go against the dollar this year - weaker.

"We will get corrections along the way, but I think the weaker bias will dominate for the rest of the year," Rand Merchant Bank technical analyst Darren Grabham said.

"I am looking for a move on the rand to about 7.50/$ and expect it to stay above 6.90/$," he told Reuters.

Other chartists agree, although many analysts who approach the rand from a fundamental economic point of view are not ready to revise their forecasts down once again. Many think the rand will strengthen back below 7.00 to the dollar by the end of 2000.

"Based on the performance of the Australian dollar, I think the rand is about four to five percent undervalued - my feeling is it could strengthen," ABN AMRO economist Colen Garrow said.

The Australian dollar has also hit successive lows against the US unit in the past week, often tracked by New Zealand.

RAND NEVER FULLY RECOVERS FROM HARD KNOCKS

But sceptics note the rand, which was below four to the dollar in 1996, has never got back to its original level when badly knocked, even when this was due to external global factors.

"We might correct back to the low 7.20's or even to between the seven and 7.10 area," another technical analyst said.

"If the euro goes to 83 cents it would probably take the rand to the 7.40-45/$ level and if it goes lower I think we could go to 7.50/$. I don't think we will go below seven for the rest of the year," he said.

The good news is that the rand has been much more stable against its trade-weighted index, a basket in which the euro accounts for 35% of its value, while sterling comprises 15% - the same as the dollar.

Against this basket, the rand has only shed about 6.50% of its value so far this year.

This means that the inflationary impact of its descent against the dollar is likely to be limited, although the fact that oil prices at decade-highs are pushing up the cost of dollar-denominated fuel imports will exacerbate the trend.

But analysts note that another factor which will keep the rand from making a full recovery, even if the euro gains ground, is chronic negative overseas sentiment towards the region.

"It's not just dollar strength (hitting the rand) but negativity from foreign investors towards Southern Africa," ABN AMRO's Garrow said.

"If you have any speculation of political uncertainty you have speculation thumping the rand - it's a reality," he said.

Issues like the slow pace of privatisation and strains within the country's governing coalition would give foreign investors the excuse to take fright, he added.

http://news.24.com/News24/Finance/Markets/0,1466,2-8-21_914558,00.html

-- Martin Thompson (mthom1927@aol.com), September 20, 2000