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If you are searching for clues on how the rand will move next, watch the iron-ore price.
The South African currency is closely tracking the fortunes of the raw material, with the 40-day correlation in daily moves climbing to 0.91 this week, the highest since January 2018. A value of 1 would indicate they moved in lock step.
The rand has strengthened 2.5% against the dollar since January 25, when a fatal dam disaster at Vale SA’s Brumadinho mine in Brazil curbed iron-ore supplies, sending the price soaring.
About a quarter of the rand’s moves can be ascribed to iron ore prices, according to Standard Bank, with a one percent rise in the commodity equating to about a 0.5% gain for the currency. The mineral accounts for 12% of total South African mining production and close to 18% of base-mineral exports.
“We are in the top 10 ore-producing countries in the world,” Thanda Sithole, a Johannesburg-based economist at Standard Bank, said in a client note. “The rand therefore naturally has a correlation with iron-ore prices.”
Shares of Kumba Iron Ore, South Africa’s biggest producer, have jumped 18% since the dam collapse.
