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The rand is on the sidelines of forex

Dec 18 2016 06:03
Riana de Lange

Johannesburg - The rand is losing its place in international foreign exchange trading as local political events scare off investors and as the prospect of higher US rates has lead money to move to the US dollar as well as other hard currencies.

The local currency this year dropped to 20th place on the list of the most traded currencies worldwide, while it had been 18th up until 2013 and in 13th place in 2001.

This is the picture that emerges from data from the Bank for International Settlements (BIS).

Jana van Deventer, head of financial markets at ETM Analytics, said that local political developments had dented sentiment towards the rand and there had been a shift from emerging currencies to hard currencies like the US dollar, the yen and the euro.

Van Deventer said although the proportion of rands in global foreign exchange turnover had shrunk from 1.1% in 2013 to its current level of 1%, it is still among the top 20 currencies being traded worldwide.

The rand’s turnover also exceeds those of a few of its emerging market contemporaries.

According to Van Deventer, the volume of trade in a foreign currency is seen as a measure of sentiment towards that currency.

It gives a good indication of liquidity and investors generally feel more comfortable with exposure to a highly liquid asset.

Eike Feltz, CEO of Currency Partners, said the liquidity of a currency was an important factor for investors who wanted to ensure that they could easily take an investment position or withdraw from it.

ETM said it was not too concerned about the decline in the proportion of rand in global foreign exchange turnover, because the levels tended to fluctuate in cycles.

“If we increasingly see a decrease in rand turnover, it could make red lights flash in relation to the currency’s liquidity, which can in turn be negative for investor sentiment.”

But Van Deventer said the rand’s 1% had to be seen in context.

READ: INFOGRAPHIC: How resilient rand weathered 2016 shocks

According to BIS, the most traded currencies are the dollar (87.6%), euro (31.3%) yen (21.6%) and pound (12.8%), which constitute 153.3% of the total 200% of global foreign exchange trade. (Because two currencies are involved in every transaction, the sum of the percentage share of individual currencies comes to 200% instead of 100%.)

Feltz said that the decline in the rand’s contribution to the foreign currency market could be because other currencies’ contributions grew faster. But the absolute average daily value of rand trading still decreased from $60 billion (R820 billion) to $51 billion.

Van Deventer said some of the biggest emerging currencies were only just doing better than the rand, including Russia and India (both on 1.1%), while the lira (1.4%) and the won (1.7%) had higher trading volumes.

Feltz said the past year’s political and economic uncertainty made South Africans nervous about the investment of their capital.

“Ignore the local and international drama. Look at the long-term benefits of the currency market instead of chasing short-term profits,” he warned.

Feltz said the rand rode a seesaw this year. “Last December we saw how markets can decline. Now, after the US election, it’s happening again.

“Don’t let the short-term advantages of foreign investments motivate you, because the foreign exchange market is highly variable and unpredictable. Rather look at the long-term benefits of foreign investments and stick to your investment plan.”

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