PRETORIA, June 29 (Xinhua) -- South African currency rand is trading fairly or correctly and not overvalued or undervalued, said the Rand Merchant Bank (RMB) on Monday.
The bank released "RMB Milk Index" which compared the price of milk in African countries to gauge whether currencies are priced at their "correct" or "fair level".
"According to our Milk Index, the rand is actually overvalued by 1.92 percent, which is minor given the volatility of recent months. Technically this implies that the rand should be trading at 17.36 to the greenback, so by this measure, it is fairly valued," said Neville Mandimika, economist and strategist at RMB.
He said the Milk Index showed that the rand, along with the Egyptian pound, stood out as trading closest to fair value.
"Both currencies typically move in line with economic fundamentals, so both currencies better reflect demand and supply conditions," he said, " 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."
He said unlike the rand and the Egyptian pound, most other African currencies are overvalued, with knock-on effects on the price of milk.
Mandimika said the price of a litre of milk in South Africa is 0.98 U.S. dollar while in Ghana it is 2.04 USD and in Nigeria 2.48 USD.
"The Milk Index assist investors and companies 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 or strengthen. So economic players can reasonably count on some stability in their currencies," he said.
RMB said their index is similar to The Economist magazine's Big Mac Index, but uses milk instead because it is available all over the continent. Enditem
