Divining the Rand - Jos Gerson

[Uncle]

Listened to this guy last night. He made a lot of sense then.

http://m1.mny.co.za/WGETrnd.nsf/Curr...1?OpenDocument

His was a lone voice in the wilderness, but now Merrill Lynch economist Jos Gerson’s bullish views on the rand are becoming increasingly plausible.

While he looked like he’d lost his marbles when the rand slumped to 13.85 against the dollar in December 2001, the Cape Town based number-cruncher stuck to his guns, insisting the rand was grossly oversold and should be trading in the R7.50-R8.50 range.

Speaking on Classic Business last night, he said he trand’s fortunes are closely tied to the Australian dollar which he believes is in a multi-year uptrend against the greenback.
“My model shows me the rand going to 4.30 against the Aussie in the short term which translates to around R6.95 against the U.S. currency,” said Gerson.

“I see the Aussie strengthening to 70 US cents late next year from is current 62c, which could see the rand moving to around R6.13 against the U.S. currency,” he said.

Further out, Gerson says the Aussie’s par value against the greenback is 80c, equivalent to the rand strengthening to between R5-R6 to the dollar.

According to Gerson, the rand and the Aussie are twin currencies, both closely linked to the fortunes of primary commodity exports.

He believes that commodity prices will rise sharply over the next few years, protecting South African companies from the dilution effects of the stronger rand on their earnings.“We may not match the Aussie’s rise exactly due to the inflation differentials between South Africa and Australia and this will take a little steam out of the rand,” said Gerson. “But even though the rand may weaken a little on upcoming interest rate cuts, it won’t crash,” he said.

Merrill Lynch’s official forecast for the rand against the dollar is R8 by the end of this year and R7.50 in mid 2004. However, Gerson’s forecasting model is much more bullish than the official estimates.

Gerson is the second commentator this week to be highly optimistic about the rand’s prospects. Former Sacob CEO and rand commission whistleblower, Kevin Wakeford, on Tuesday said he thought the rand could strengthen to R4 to the dollar by April 2008.

Asked about Wakeford’s forecast, Gerson said the broader idea was correct and the forecast was “not that crazy.”
“One should not see the rand in isolation. It is closely linked to commodities and these look like heading sharply higher in the medium to longer term,” said Gerson.

He said his forecasting model is similar to a model used by the International Monetary Fund, so it is not that outlandish.
“When you strip out inflation, the rand and the Aussie are almost twins and if the Aussie is in a long term repair phase, it’s going to drag the rand along with it,” said Gerson.

So while we may clash with Australians and usually lose to them on the sports fields, let’s hope we can celebrate something together: stronger currencies and improving economies.