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How will the Rand shape?

How will the Rand shape?

All quiet on the currency front. The Rand is midway and has been for six months in 10.30-10.80:$ territory, a tight range and lengthy stay for a currency that can move 200 cents in any direction and not tell you anything about what comes next during more unsettled times.

Which is the crux of the matter. We are but in a temporary lull, along with other Emerging Market (EM) peers, in what remain very unsettled times globally. And another period of currency adjustment is to be expected sometime, such being apparently the way the world progresses through major changes.

And none bigger than the one we still find ourselves in, having started in 2008 and lasting at least through 2020 (though a case can be made that once the post-war2 adjustment phase ended in 1968, and the world became once again experimental in its institutional arrangements, the very dynamic of global change has not allowed us even momentary peace ever since).

So more Rand weakness likely ahead, as also the case for other EMs.

Even so, it is a decided advantage that we have already traversed the first major adjustment, from robustly overvalued to modestly undervalued. At least that adjustment we won't face a second time in this cycle.

Also, along with a few other EMs, we are singled out as being more undervalued than some of our peers, with the Rand reflecting our fragile balance of payments deficit, our struggling export competitiveness, our fractious labour relations, our somewhat over-stretched government finances, our slow growth, our sticky budget deficit and still climbing national debt ratios, and skittish rating agencies.

All these features have reinforcing elements in them. Domestically we see it in continuous low business confidence ever since coming out of recession in 2009, and externally such realities could eventually also nudge foreign sentiment the wrong way, once rising global yield levels force renewed risk rerating.

So we are effectively on a ledge, on the brink of being pushed over the edge anew by events, and potentially seeking even lower Rand levels.

But our fragility is already reflected in our Rand, and so that relative rerating doesn't need to be repeated either.

As things stand, the Rand fully reflects our current standing in the world, as much externally as domestically. What it possibly doesn't yet fully reflect is the probable impact of further global adjustments to come later in the decade (as soon as from next year?).

The very size of the coming shifts are intimidating,  yet we have already been adjusting in preparation and are giving off strong signals of being very willing to do more, if need be (thinking higher interest rates).

That opens up a rich array of possibilities extremely difficult to read ahead of time.

On the one extreme, the global adjustment may acquire new shock aspects as US growth diverges from the expected trajectory, or the Fed changes its mind and policy stance trajectory, or market perceptions diverge about either.

On the other extreme, it may all proceed very benignly, with US growth modest, resource uptake slow, inflation benign, and central banks ever so gingerly feeling their way, with markets buying all this tenderness. This could keep the market adjustment to higher yield levels more controlled, and less severe for its EM ramifications, to the point of barely noticing anything, provided domestic policy stances travel the same path in tandem.

In between these extremes there remain many different shades, all potentially reflected in the Rand, depending on outcome.

My personal preference remains for a digestible trajectory, slow even if very pertinent, with the Fed raising rates at least 3.5% through 2018, and our SARB and other EMs following this lead, with markets adjusting, but recognizing the ongoing global growth and subdued inflation, not losing confidence, but indeed having it bolstered.

That is asking for much, given last year's taper tantrum, and the severe shock treatment meted out to various (fragile) EMs.

Yet the journey through 2015-2018 need not be a repeat of 2013 even if the risk is ever present. If the greater game plan keeps working, tantrums were school fees rather than repeat scripts. But only time can tell.

The more benign interpretation gives Rand weakening at inflation differentials (no further weakening in real, inflation-adjusted, trade-weighted terms). That means weakening the Rand at say 3% annually. It would suggest annual trading bands hardly recognizably different from the present 10-12:$ potential territory.

Shock treatment (market tantrums) would obvious weaker the Rand much faster and further, as much as 100 cents annually through 2020.

Really severe shock treatment could be even more Rand devastating, with annual band weakening at times of as much as 200-300 cents.

Despite shocking daily news flow, and breathless reporting from New York and Washington, with fringe events (like Argentinian debt default and disastrous Portuguese bank failure), my personal sense remains for a manageable Rand transition.

The main anchor, ironically, given historic precedents, will be the Fed.

Whether markets keep to this script, too, we are about to find out.

We are already undervalued in real terms, reflecting just the way markets read us and events. Only exceptional new shock events may shock us much more heavily in real terms. For now that remains speculation, not a given.