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.