South Africa Rate Cut: Positive for Currencies and Commodities

 |  Includes: EZA, SZR
by: Emerging Money

The Johannesburg central bank moved to cut local interest rates a fairly steep 50 basis points a few weeks ago, surprising few in the markets. Here is a great example of how to manage a strong currency.

Governor Gill Marcus and her colleagues are cutting rates because they believe that, among other things, there is still room in the global economy for stimulus given persistent overcapacity and the still-fragile state of the South African recovery in particular.

A strong rand has already chilled local companies' ability to compete in foreign markets and the currency wars have only made the problem worse.

Every casual trader should reflect on this part of the central bank statement:

"Quantitative easing has a spillover effect on emerging markets economies. The search for yields resulting from this increase in liquidity has implications for the exchange rate of the recipient countries."

"South Africa has been no exception in this respect and appreciation pressures are expected to persist for some time."

In other words, QE2 -- and its predecessor, the first big round of Fed bond buying -- has been pushing capital into emerging markets and will continue to do so.

This is a long-term positive for non-dollar-linked currencies as well as commodity prices.

The effects on EZA and SZR, the rand-based ETF, are positive as well; are these funds digesting the strength of the central bank announcement, or simply encouraged by the central bank's acknowledgement that a strong rand is here to stay?

The bottom line is that the rand is a great example of a currency that is truly strong, but has been a net boost to efforts to keep inflation in check. Ultimately, this should be good for the miners and South African consumer stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.