Johannesburg - SA’s increasingly weak currency is again in the spotlight as the Competition Commission starts a probe into alleged currency manipulation.
This comes just after Barclays and Goldman Sachs were accused of being behind the currency's recent collapse by short selling the rand.
Now the commission is looking into whether JPMorgan Chase, Barclays Bank, Royal Bank of Scotland, Citigroup, Swiss-based UBS and Bank of America manipulated the rand and caused it to plummet. These international institutions were fined a total of $5.6 billion for currency manipulation by UK and US regulators some time ago.
Over the past 10 years, the local currency has moved from a monthly average of R5.96 in January 2005 to an average R13.66 in September last year before slumping to around R18 this January, when it hit an all-time low. Currently, it is trading at R16.33, as of 9.44am SA time.
The currency has also spiked, losing much ground, recently - such as when it hit almost R18 on January 10. This has prompted suggestions that there is more at play than scared investors dumping emerging-market currencies.
One foreign exchange trader, who asked not to be named but whose identity is known to IOL, says there are parts of forex trading that are underground. He suggests there is almost a currency mafia that is manipulating the rand to keep it as low as possible to fend off policy moves that would harm the world’s super powers.
Manipulation does happen, he says, and currencies are manipulated to keep governments in check and protect the interests of countries such as the US, which dominates global trade as the bulk of international interactions are done in dollars.
Big business
Foreign exchange trading is big business, he says, noting that $5 trillion is moved around in currencies in any given 24-hour period. In addition, he says, forex is the top way to make money in the world, ahead of other so-called trades such as drug dealing and human trafficking.
“You make more money faster than even the drug dealers.”
Because it is such big money, he says, the stakes are very high and there is speculation whenever a world event happens that could move a currency, or a commodity. For example, he explains, a war that starts in an oil-producing country will see oil being bought into heavily. This, he says, is because the price will spike and traders will profit when they sell at a higher price.
Another way of profiting is to go long on a commodity or share. This, the forex trader explains, is when a trader buys into a stock that will endlessly increase in value because the demand will always be there, such as Colgate or wheat futures.
“Colgate is never going to go away, as long as people have teeth.”
The converse of this, and what Barclays and Goldman Sachs were accused of doing, is to look to a volatile item, such as oil, and take a short-term view, buying speculatively and getting out when the stock goes up.
Another way of shorting is to sell to the lowest bidder, and keep selling so the item - currency, futures or stock - is pushed lower, which allows traders to buy back in at the lower price and, hopefully, make a profit.
But, says Vestact analyst Sasha Naryshkine, this could also result in a large loss to the trader.
No manipulation
Mohammed Nalla, head of strategic research at Nedbank Capital, argues, however, that there is no market manipulation, and that it is not possible to short sell a liquid currency.
He says, if there was manipulation, this would be seen in disproportionate price spikes.
Nalla says the rand’s weakness is because the country is vulnerable to capital flows and investors have been reversing out of emerging markets into ones that they see as safer. This has affected currency trades, equities and bonds, he adds.
With the increasing likelihood of a ratings downgrade, investors are simply looking for safer economies, adds Nalla.
Nalla does, however, point to two “strange price examples”. The first on August 24 last year and the second on January 10. However, he notes both these trades took place when the rand was very illiquid and in the Asian market trading session, when Japan was on a public holiday.
He attributes the movement to the lack of volume being traded, noting that a small trade down on a day when volumes are thin will move a currency more than if it happened on a day when there was lots of movement.
Nalla adds this is not a case of market manipulation, which is illegal and would be spotted in the market and requires billions and billions to pull off. He adds shorting is a market mechanism which traders use to make profits and only becomes illegal if a country intervenes to stabilise a market and bans the mechanism for some time.
Barclays, meanwhile, has denied the ANC Youth League’s claims that it shorted the currency, arguing that it is fully invested in South Africa and would not harm the economy.
IOL