An Article by Ian Kilbride.

For the past two decades, the long-term trend of Rand weakness against major currencies, with intermittent periods of strengthening and recovery, has been the predominant pattern guiding South Africans’ local and international investment decisions.

The historical comparison is spurious, but let’s make it anyway. From its launch as a currency in 1961 through to 1971, the Rand traded consistently stronger than the US dollar and it was only as late as 1982 that Rand/Dollar parity was reached. To place things in further perspective, the Rand had weakened by over 100% to R2/$ in 1985 and crashed when South Africa closed its forex trading in August 1985. At the time of democracy in 1994, the Rand had slid to R3.60/$, weakening further to R6/$ by the time of the Mbeki Presidency in 1999. Significantly, the external shocks of 9/11 and the contagion effect of the Zimbabwean land invasions in the same year plunged the local currency to almost R14/$ by December 2001. 

But here is where the story becomes more interesting and the issue of Rand volatility really kicks in, as within a year, the Rand had strengthened all the way to below R9/$. By 2014 the local currency had weakened to R15/$, plummeting to R17,90 in reaction to former President Zuma’s firing of Finance Minister Nene and the ‘week-end special’ appointment of Des Van Rooyen in his stead. Yet, on the very same day of Pravin Gordhan’s (re) appointment as Finance Minister in January 2016, the Rand strengthened to R16,57/$, rising to R14,16 in April of the same year.

Despite the hype and false hope of a ‘New Dawn’ under the leadership of President Ramaphosa, the combination of the fall-out from the Covid-19 economic lockdown, Eskom debt and power crisis, sterile economic performance, political uncertainty, South Africa’s ‘Grey Listing’ and lack of policy reform propelled the local currency to a new historic low of R19,51 in May this year. Yet, as I type this, the Rand has strengthened to R17,74/$.

So why is the Rand so volatile and what can we expect going forward?

The answer to the first part of the question is relatively simple and that is the Rand has the potential to be a volatile currency due to the fact that it is widely tradeable. While this may seem fairly obvious, the easy tradability of emerging economies and particularly African currencies is relatively uncommon. In this regard, the sophistication of the South African economy and the relatively advanced nature of its financial system is a double-edged sword. On the one hand, it means that foreigners can invest in and trade in South Africa’s financial and capital markets, but equally, they can disinvest and withdraw easily. Unlike other emerging economies, South Africa allows its currency to float and having burnt its fingers in the early 2000s, the Reserve Bank and Treasury no longer attempt to intervene directly in the currency’s exchange rate. In the past, countries as wide-ranging as Argentina, Brazil, Indonesia, Russia, Thailand and Turkey have all depleted their foreign reserves to prop up their respective currencies and have achieved nothing positive for their economies by doing so. Indeed, such efforts have provided gilt-edged opportunities for global forex traders to ‘short’ emerging market currencies, which serves to deepen the domestic economic problems.

Yet the South African rand remains an outlier among emerging market currencies and according to the IMF, only the Russian Rouble and Argentine Peso have been more volatile over the past decade.

This is accounted for in part due to the structural nature of the South African economy and as a major commodity exporter in particular and thus, the Rand is sensitive to global factors driving demand. It comes as no surprise that the other significant factor influencing Rand volatility is South African domestic politics and uncertainty. This was most recently demonstrated by the huge sell-off in the Rand in May when Pretoria Africa was accused of supplying weaponry to Russia under cover of darkness, thereby alienating its major Western trading partners and foreign government bond holders. This political own goal combined with the most intensive power cuts in South Africa’s history to make for a perfect storm of unprecedented Rand weakness.

Although historically one of the top 20 currencies traded globally, Rand trade accounts for far less than 1% of the $7,5 trillion traded daily. Yet the ZAR remains a favourite of emerging market currency traders, for example, as Bloomberg recently reported, retail investors in Japan, who dominate spot trading in Tokyo’s foreign exchange market, have increased their bets on volatile currencies (including the Rand), despite potential monetary policy shifts domestically (announced as I write this).

Economists remain divided on the future direction of the Rand, with many regarding the currency as oversold and undervalued and consequently forecasting some strengthening from 2024 onwards. Indeed, Goldman Sachs sees the ZAR strengthening progressively back up to R14/$ in 2026. These are brave calls, but one thing is abundantly clear, Rand volatility is the new normal and we all need to be prepared to ride this rollercoaster.