ROB Price is a market analyst from ETM Analytics. BUSINESS DAY TV: According to ETM Analytics, the US dollar has broken through a key technical resistance level and a breakout could trigger phase two of the dollar’s bull market. ETM’s Rob Price joins us in the News Leader studio and still with us is Liston Meintjes, portfolio manager at Lion of Africa Fund Managers. Rob…thanks so much for joining our conversation and we touched on it briefly a little earlier. The dollar seeing a reprieve with its perceived safe-haven status coming into play and doing it some favour. Is this the beginning of the dollar bull market as you see it? ROB PRICE: I believe it started some time ago and I don’t like to place too much importance on technical analysis but the technicals are irrefutable. But yes, if we look at the fundamentals of what’s going on here, there are such strong drivers of what’s happening, and it will probably continue. A, we’ve got a large divergence of monetary policy between what’s going on in the US and the rest of the world, the US Federal Reserve finished its quantitative easing (QE) whereas in the Europe we’ve still got QE going on there, in Japan they’ve still got a huge amount of QE, in China it’s a big story…they’ve got a loosening of monetary policy. This is all feeding into a stronger dollar environment. And another factor that we have to consider is this slowdown in emerging markets, there’s this tightening in credit growth and a demand for dollars…a lot of demand for safety in the dollar. So we need to sift through the noise a little bit some of the time. Greece is a little bit noisy…I’m not sure that Greece is the driver per se, China is a big story, but for me what is the bigger story is that these little stories are all feeding back into the US dollar. And the dollar is really the big story at the moment…it’s gaining, and as the dollar continues to gain, commodities are under pressure, emerging market currencies are under pressure and those are the really big stories for me at the moment. BDTV: We’ll be getting into the detail of the ripple effect in a bit, but before we do, is the view that you hold an unwavering view, come Fed rate hikes or not? RP: It is…the dollar will probably continue to strengthen with or without the Fed rate hikes because of those fundamental factors I said, in the background and the Fed rate hikes will definitely have an impact. If the Fed delays its rate hikes, that will have an impact and that will soften a dollar bull market. But I believe that those fundamental factors in the background will continue to drive this outperformance of the dollar relative to the rest of the world. BDTV: Okay, Liston, let’s bring you into the conversation at this point, do you agree? LISTON MEINTJES: Well again, markets adjust and at some point in time, European benefits of a lower euro will result in higher profitability for them, and maybe people will want to transfer their attention on a capital flow into some of the shares in Europe. Now I’m not saying this is going to happen this week, but that’s the kind of thing that could happen, and certainly I would expect some merger and acquisition activity to exacerbate that as well. The way I’m looking at it is I’m saying Porsche is selling cars in America in dollars…they’re producing them now with lower iron ore prices and a few other lower costs, but notably, their labour and their land is costing them a lot less in dollars, so their profitability must go up. And you can’t say the same for the US…in fact some people are actually saying that the stronger dollar is actually hurting that economy. So you get to a point of balance somewhere. Exactly where that point of balance is, I’ll leave to the markets to decide. I don’t like to use the word “markets�, I’d rather say the market participants. So somewhere down the line, someone will say, you know what it’s worth our while to go and buy maybe a tower in Croatia rather than…you get my point? RP: I do get your point and I’m not arguing with your point there, but I do think that if we miss out on these big shifts in currencies and monetary policy, we lose out on notable returns in the financial markets at the moment. The fact is that the major drivers of economic growth in a world where there’s almost no economic growth at the moment are central bank policies, and those are what’s driving economic growth, particularly in nominal terms. In real terms there’s not much growth anywhere at the moment, but in nominal terms it’s the central banks…when they loosen, when the European Central Bank loosens then everyone wants to rush into euros and so on and so forth. But if we miss out on those shifts, if we miss out on the dollar bull market and we try and invest purely on just company fundamentals you could just sit with terrible returns because if you denominate it back into dollars you’re doing terribly. For instance if you’ve invested in the ALSI since about 2010 and then you repatriate that into US dollars then you’re sitting flat…the ALSI is flat in dollar terms. So investors have to bear that in mind when they look at their returns. BDTV: Let’s take a look at all that you’ve mentioned so far and the implications for the South African macroeconomic picture right now, how are you seeing it coming to bear on the growth scenario and implications for the South African Reserve Bank (SARB) and its interest rate trajectory come…or come not interest rate hikes in the US? RP: Going back to my original story, the dollar bull market is really the big story here. The rand is on a notably weaker path at the moment and central banks around the world are trying to loosen policy in this low growth environment. However, the SARB has got its hands tied because it has implemented quite imprudent monetary policy over recent years and now is bearing the brunt of that through this weak rand. So the pressure is on the SARB to hike once again, with or without the Fed. Yes, the Fed might delay and that might delay the SARB rate hikes, but the monetary imbalances that have taken place in SA as a result of imprudent SARB monetary policy, advocate higher interest rates. We need higher interest rates, we need higher real interest rates in order to correct those imbalances and that’s being evidenced in the rand. We were trading up to R12.50 today and the dollar-rand can move higher and that will force the SARB’s hands over the coming 12 months. BDTV: Of course ETM Analytics has been an advocate of the SARB raising rates earlier rather than not having raised them at all. Liston, what is you view on that…is now the time to be hiking rates in SA? LM: The real question is why will we do that? We have a fairly high differential between our interest rates and those of our major trading partners. It’s a very interesting debate, I’m not decrying anything that Rob says, and in fact I probably support most of it. I would just like to put an extra dimension to it. You have Australia, which is now struggling with low commodity prices and they’re considering having another drop in interest rates because things are so bad there. Now all I have to tell people is that I have seldom seen the South African economy this bad. I promise you, every day another anecdote hits me between the eyes saying how bad things are. And raising interest rates, if that’s designed to reduce inflation, I doubt it. If it’s designed to keep foreigners happy so that they keep putting money in so that the rand doesn’t depreciate, that I could take as a case. But at the end of the day, if you borrow at 10% you have to pay back 110%. BDTV: So does that then not exacerbate our growth problems, Rob? RP: We have to ask ourselves two questions…one, are the interest rate cuts around the world supporting economic growth? …they don’t seem to be. Economic growth is terribly weak. Two, periods of strong economic growth in SA have always taken place after high real interest rates, that’s a fact. Go back, look at the data…SA performs well when we’ve have a period of high real interest rates. The reason why that is, is because one of the points that Liston mentioned, yes we get foreign capital, but also domestic capital, it encourages people to save and invest in long-term projects and that’s what drives economic growth. And another interesting point that you’ve brought up there, Liston, is talking about how foreigners interact. I believe that the rand is so fragile that the SARB will be forced to hike because of the fact that foreigners are starting to take their money overseas, and not actually about inflation. And I wish it didn’t come to this point where we’re kind of catching our tails, but I believe that’s where we are coming to. The capital is going to be flooding back overseas and we’re forced to hike in that context

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