No need to fear the rand | Fin24

No need to fear the rand

Apr 17 2019 08:00
Simon Brown

The rand is something South Africans obsess over. 

Hourly news reports on TV and radio will include the exchange rate, and almost every political or economic event will also be accompanied by how the rand responded. 

But does it deserve this level of attention and concern?

Firstly, it is important to remember that the rand is very volatile to the downside with ‘crashes’ an almost common occurrence. The sense, when speaking to most South Africans, is that our currency is a one-way bet for massive weakness. 

Yet, while weakness is assured, it will actually be gradual over time. 

In a perfect world, one currency will weaken against another by the difference in their inflation rates. 

That means that if our local inflation is 5% and the US has an inflation rate of 1%, we should see the rand 4% weaker against the US dollar every year. 

This weakening via inflation keeps products similarly priced.

But this weakness does not happen in a straight line. 

Often, we see periods of severe weakness in the rand, which is usually followed by prolonged periods of rand strength. 

For example, in December 2001 the rand hit its then worst level of R13.61 against the dollar before then strengthening to below R6 against the dollar in 2005. 

More recently, in early 2016, we saw the rand at almost R18 against the dollar and since then it strengthened to under R12 against the dollar in February last year and is currently at around R14. 

Yet, whenever I suggest rand strength to people, they smile and shake their heads – undoubtedly thinking that I have lost my marbles.

The point is to understand what moves our currency in the short term. Mostly it is good old-fashioned supply and demand. 

If a foreign investor wants to buy our shares, bonds or any other local assets, they would first have to buy the rand. 

Rand strength therefore usually means foreign buying of South African assets. 

The issue here is that, at the right price, investors want to own our assets if they feel they’ll get a decent enough risk-adjusted return – regardless of political statements or the overall strength of our economy. 

In a low-yield environment, our government bonds are attractive with a yield of some 8% and, quite frankly, no real risk of default. 

At times we will see foreign buying, and this will result in rand strength. 

Hence, we see the rand move stronger and worry that with our offshore-dominated Top40 the market will weaken. 

Yet it moves higher, as the stronger rand means money moving into the country and much of it buying our stock market.

We also need to recognise that our currency is one of the most traded currencies in the world and in many senses is a proxy for all emerging market (EM) currencies. 

If a trader in New York wants to take a position in EM currencies, they could trade a basket of EM currencies, but many lack liquidity and have restrictions in place. 

Foreigners therefore often tend to just trade the rand, creating further volatility that then attracts even more traders who like the volatile nature of our currency.

Let me illustrate just how stable the rand is over the long term. Since 2000, the rand has weakened from around R6 against the dollar to a current R14-level. 

This is a move of some 135%. 

Yet, over the same period, the Top40 has moved from under 6 000 to a current level of around 52 000, a move of over 700%. 

In other words, over the long term our rand is actually a lot less scary than we think, and we need to remember this in our long-term thinking.

In short: Panic less about our currency and accept that in the short term it is very volatile, but that over the longer term it is actually very stable. 

This article originally appeared in the 18 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.


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