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Bleak outlook for struggling rand

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An uphill struggle awaits the rand if European leaders fail to act swiftly to resolve the region’s debt crisis.

Last week the rand fell to its lowest levels against the dollar since mid-2009 and on Friday even touched R8,61.

Early Friday evening it was again trading around R8,50 to the dollar.

Ian Cruickshanks, head of strategic research at Nedbank Capital, said the rand could possibly soon pass the R9 mark.

“If it remains at R8,50 within the next few months it could easily fall to R9, with a risk of weakening even further if the European situation worsens.”

Concern about the European debt crisis worsened last week when Germany was unable to sell the government bonds it offered on auction. Investors have so far regarded German government bonds as a safe haven within Europe, but they now appear to want to avoid the region entirely.

On Friday Italy also had to commit to 6,5% — about twice last month’s rate – to borrow money for six months.

Investors currently regard the dollar and US government bonds as a safe haven, resulting in the dollar strengthening against other currencies.

Since the beginning of the year foreigners have been net sellers of South African stocks and up to last Friday had sold shares worth R17,4 billion.

During the corresponding period last year foreigners were net buyers of shares, to a value of R29,2 billion.

Cruickshanks said these sales did not reflect the state of the South African economy, but simply investors trying to steer clear of any risk.

“Investors are looking for a safe place for their capital. They might not receive a big return, but they know that they will at least get their money back.”

And it does not seem that the concerns and uncertainty over Europe’s economic prospects will abate soon.

On Thursday investors were disappointed when a meeting between the leaders of Germany, France and Italy could come up with no immediate solution for the region’s problems.

Investec economist Annabel Bishop said chances of a financial crisis and resultant global and local recession will increase if Europe’s leaders continue to drag their feet finding a solution.

“Stagflation (rising inflation and weak growth) will prevail. We think the chances of the scenario being realised are around 45%, because markets are already showing impatience with the eurozone’s lack of urgent commitment to a solution.”

Should this come about, Bishop expects that the average rand/dollar exchange will reach R9,25 for the fourth quarter of this year and R10,30 in the first quarter of 2012.

But she believes there is a possibility that European leaders will act quickly and effectively enough to check investors’ aversion to risk.

The rand’s average exchange rate for the fourth quarter of 2011 will then be R7,95.

“We think there is a 50% chance of this happening, but every day that the eurozone postpones action this diminishes.”

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