The currency market is again in turmoil and lacking a miracle will remain so until a solution to Europe’s debt problems is finally found. Could that solution be the demise of the euro and a reversion back into the old currencies? Rumour has it that even Germany, the most stable country in the Eurozone, has printed deutschmarks ahead of that possible event. This, unlikely as it is, would be thrown all markets into chaos and the rumour adds to acute nervousness in the currency market.

While South Africa is not involved in overseas debt problem and still has better interest rates than most, foreigners are no longer piling into rands as they did in 2010 and early 201l. This has resulted in the falling value of the rand. In the second half of 2011, the rand lost almost 28% against the US dollar. There was a recovery start the start of this year, but since the start of March the rand has lost 8,47% against the dollar, 9,19% against the pound and almost incredible, given its dire circumstances, 5,29% against the euro.

A falling rand is inflationary as we’ve already seen at the petrol pumps where the 11% fall in the price of oil in the past six weeks, has so far not been reflected. Already prices of imported foodstuffs, like coffee, have rocketed, and other imports will follow. While the lower value of the rand and is good for exporters, a shock drop in manufacturing and falling metal prices, may have negated the advantage.

In the 1990s and early 2000s rand hedging became highly profitable. From 1990 to 1999 the rand lost 140% against the dollar and another 117% in the following two years the rand eventually hit a low of $1/R13,75. From 1990 to the end of 2001, the rand lost 379% to almost touched R20 against the pound.

Currency hedging is undertaken to minimise exposure to unfavourable shifts in the money market. Back in the 1990s and early 2000s, tight exchange control regulations made it difficult hold foreign currencies, but investors got around this by holding mining stocks. Today, exchange controls have been substantially relaxed, which gives the holder of rands far more opportunity to convert to alternative currencies.

For several years after its inception, my preferred investment currency was the euro, but I now see it as high risk. When my head rules, I see the US dollar as the currency that seems always to eventually float back to the top, come what may. Of course in this changing world, the brave investor may prefer one or more of the Asian currencies, or the hitherto reliable Swiss franc, but even that is now losing against the US dollar. While the UK’s problems seem no nearer a solution, as the country of my birth, I still have a fondness for pounds.

However, my greatest fondness is for shares, but rather than the erstwhile rand hedges, mining, and particularly gold shares, I prefer those that have dual listings, or earn in foreign currencies. Our sugar companies, for example, trade in a mix of currencies and as well as sugar export its by-products and other commodities. Tongaat’s six divisions, earning in dollars and euros offer starch, sugar glucose, aluminium, property, building materials and textiles. Illovo’s by products include bio-fuel while Crookes is involved in animal husbandry.

My most favourite rand-hedge as well as oil-hedge stock is Sasol, the share that recently left egg on my face after drawing attention to its buy signal which was scuppered by results of Greek and French elections. The good news on Sasol is that it has now repeated that buy signal.

For those investors who prefer a currency, I’ve drawn a chart that shows what has happened to the rand over the past 12-months during which the rand lost 15% against the pound and almost 17% against the dollar. I have used candlesticks for the pound and a red solid line for the US dollar. The lines running diagonally over the plotting are linear regressions, the upper of the pound and the lower of the dollar.

The rand began weakening again six days ago and against the pound it is now only 2,5% stronger than in November and 5,4% stronger than the dollar. The MACD (moving average convergence/divergence) plotting had broken through it signal line indicating that it will continue weakening.

(Click on the chart to see it more clearly)

Jean temkin