Can Governor Kganyago tame the rand?

The announcement that deputy governor Lesetja Kganyago will succeed outgoing Reserve Bank governor Gill Marcus in November was well received by the markets, being the first time in over two decades that someone has been appointed from within the bank. Kganyago was quick to say that he would not disappoint and that the primary objective of the SA Reserve Bank was to “protect the value of the rand in the interest of balanced and sustainable growth.” While this sounds good, especially at a time when the rand is at such weak levels, does this mean that our new governor believes he can tame the rand? While “protecting the value of the rand” is the mandate of the bank and has been for many decades, unfortunately it is a misnomer and based on a false belief that Central Banks can control the market – when history has shown just the opposite. Ask former governor Chris Stals, who wasted over $21bn to try to protect the rand’s value around the time of the South East Asian crisis in the late 1990s. The fact is – the market is in control of the market, not any Central Bank. But you may ask – “What about interest rates? Surely this is a lever that is in the Bank’s hands…” That is widely believed, but the facts tell another story. The Chart below, which dates back to 1999, shows the three-month Treasury Bill yield against the repo rate. As can clearly be seen, when T-bill yields have risen, SARB has been forced to raise rates. When they have peaked and start falling, SARB has dropped rates, and has had to follow the market all the way down. And as can be seen, when SARB raised interest rates last year after holding them at record levels for so long, guess what? The market had already told them this needed to be done by bidding Treasury yields higher. Pretty revealing stuff, isn’t it!? Revealing, yes, but very much in line with what actually drives all markets. The market is in control, but what is the market? It is merely a reflection of the mass psychology in that market. This is what dictates the market, and there is nothing that any government or Central Bank can do – except to react. And so it is with the rand – the market will dictate its direction, based on the mass human sentiment of the market at any point in time. Fortunately, these patterns of sentiment repeat themselves, which gives us the ability to predict future movements with some degree of probability. For more info on the Rand, go to www.ForexForecasts. co.za/go/ZAROutlook CAPTION James Paynter is the head market analyst at Dynamic Outcomes