Rand trading at fair value

MEDIA RELEASE

29 June 2020

Rand trading at fair value - That’s according to the latest RMB Milk Index

The rand stands out among African currencies as trading close to its fair value, meaning that it is neither significantly overvalued or undervalued.

That’s according to the latest RMB Milk Index released today . The index compares the price of milk in African countries to gauge whether currencies are priced at their “correct” or “fair level”. It is similar to The Economist magazine’s Big Mac Index, but uses milk instead because it is available all over the continent.

“According to our Milk Index, the rand is actually overvalued by 1.92%, which is minor given the volatility of recent months,” says Neville Mandimika, Economist and Strategist at RMB. “Technically this implies that the rand should be trading at 17.36 to the greenback, so by this measure, it is fairly valued.”

Mandimika says the latest Big Mac Index had the rand as undervalued by 62%; but that was in January 2020 before Covid-19 kicked in and severely weakened most African currencies.

The Milk Index shows that the rand, along with the Egyptian pound, stand out as trading closest to fair value.

“Both currencies typically move in line with economic fundamentals (the rand more so than the Egyptian pound), so both currencies better reflect demand and supply conditions,” says Mandamika. “However, the Egyptian pound didn’t have to weaken by as much as the rand since the pandemic began because Egypt went into this crisis on a significantly better growth and fiscal footing than South Africa.”

Unlike the rand and the Egyptian pound, most other African currencies are overvalued, with knock-on effects on the price of milk. For example, the price of a litre of milk in South Africa is $0.98 (nearly the same as in the United States), whereas in Ghana it is $2.04 and in Nigeria $2.48.

“The Milk Index assist investors and corporates with operations in these countries with decisions around hedging their foreign exchange exposure. The advantage of being close to fair value is that there is no economic pressure on the currency to weaken (which is bad for importers) or strengthen (which is bad for exporters). So economic players can reasonably count on some stability in their currency,” says Mandimika.

End

Contact:

To set up an interview with Neville Mandimika, kindly contact:

Joandra Griesel, Rand Merchant Bank: Joandra.griesel@rmb.co.za / 082 462 6741