A volatile rand

The rand has seen marked volatility this year, starting 2014 at R11.55/USD and weakening to R12.49/USD, with retracement to R11.35/USD in Q1 2015, but mainly recording losses against the US dollar. This is according to Investec economist Annabel Bishop.

The weakest rand/US dollar exchange rate was reached in 2001 – R13.75.

Bishop says that investors favoured comparatively higher yielding US debt, strengthening the US dollar with purchases into the safe haven currency. “Quantitative easing in the US translated through into currency strength for emerging markets (EMs), with QE1, QE2 and QE3 occurring during 2008, 2010 and 2012. In contrast, quantitative easing in the euro area has resulted in EM weakness against the US dollar.”

“The announcement of future QE in the euro area in January 2015,” says Bishop, “accelerated the fall in euro bond yields. The euro has been driven towards parity with the US dollar (USD) since 2009, with the start of euro QE weakening the common currency further, and the rand and other EM currencies have lost ground on USD strength, with lower commodity prices also afflicting the domestic currency.”

Purchasing power parity (PPP) is one measure used to assess a currency’s strength or weakness. According to Bishop, the rand continues to diverge materially from its PPP valuation due to global monetary policy signals and actions; and it is at risk of further weakness and volatility against the US dollar this year.

“The PPP valuation of the rand against the US dollar is closer to R9.00/USD, but the ending of QE in the US, and its advent in the euro area, has contributed to the domestic currency running substantially weaker to its fair value. EUR/USD move towards parity has resulted in a revision to the international currency forecast, translating the ZAR forecast significantly weaker.”

In the long term, she says that the rand is likely to return to its PPP valuation, unless SA loses its investment grade rating for local currency bonds, while a loss of investment grade rating for its hard-currency sovereign debt would cause very marked rand weakness. “While historically the rand has tracked away from PPP for lengthy periods, it has ultimately returned, even after a seven year stint of undervaluation. With the US signalling it may delay its first interest rate hike, ‘or lift-off’, the rand could continue to be removed from PPP valuation for some time.”

Their average forecast for the ZAR/USD exchange rate for 2015 is R12.21.

Is our exchange rate volatility in line with other emerging markets?

“The rand’s movements have overshadowed the currency fluctuations of most of the other ‘fragile five’ members,” says Bishop, “and SA has recorded an outflow of R10.6bn this year as foreigners have been net sellers of SA gilts (R12.4bn worth), which has weakened the rand.”

In addition many emerging economies are looking to cut interest rates to stimulate growth – Turkey, India, China, Egypt, Botswana – while SA is looking more like it will raise rates.

 

 



Latest


16 Feb 2021
Transition management services partnership announced

Standard Bank has signed a memorandum of understanding (MoU) with Chicago-headquartered financial services company Northern Trust, to partner on the…

Transition management services partnership announced

Standard Bank has signed a memorandum of understanding (MoU) with Chicago-headquartered financial services company Northern Trust, to partner on the delivery of transition management services across Southern Africa. Under the partnership, Standard Bank’s clients will gain access to Northern Trust’s full suite of transition management services. Transition Management is a…

16 Feb 2021
Tax free wealth creation with property funds

By Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers, and Aimee Glisson, Director: Operations, Performance & Risk at…

Tax free wealth creation with property funds

By Liliane Barnard, CEO and Portfolio Manager at Metope Investment Managers, and Aimee Glisson, Director: Operations, Performance & Risk at Metope Investment Managers The tax year, along with the deadline for an investor’s maximum R36 000 annual tax-free savings account contribution, comes to an end on the 28 February 2021. Investors…

16 Feb 2021
Why multi-manager investing is popular

Multi-management has been around for over two decades. This investment management approach is popular among many investors because it promises…

Why multi-manager investing is popular

Multi-management has been around for over two decades. This investment management approach is popular among many investors because it promises to deliver smoother, more consistent investment returns, despite cyclical turbulence of financial markets. Given last year’s drastic swings in financial markets and continued uncertainty on how the Covid pandemic will…

16 Feb 2021
Momentum Health Solutions unpacks COVID-19 vaccine roll-out plan

Momentum Health Solutions announced its COVID-19 vaccine roll-out strategy and how it intends to support both its members, as well…

Momentum Health Solutions unpacks COVID-19 vaccine roll-out plan

Momentum Health Solutions announced its COVID-19 vaccine roll-out strategy and how it intends to support both its members, as well as the uncovered population, in being vaccinated. As the COVID-19 virus continues to spread, a third wave is imminent, should the vaccination rollout not commence soon. Speaking at a recent…


Top stories


10 Sep 2020
How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key…

How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key that dubbed America “The land of the free”, which stuck, to the unforgettable Mel Gibson monologue where an army of painted Scots were willing to trade their lives for the…

13 Apr 2020
Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19…

Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19 environment and what form a global market recovery will take.

13 Apr 2020
SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The…

SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The draft Bill, together with its explanatory memorandum, provides clarity with regards the tax relief measures President Cyril Ramaphosa announced on 23 March.

10 Apr 2020
When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved…

When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved to be most enterprising in acclimatising to challenges as they arise.


Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za