Burning Issue 2 – Where is the Rand going?

 

We wrote recently on the burning question identified by clients, “Future Growth of Investments”.

In this newsletter we will present our views on future Rand exchange rate. We need to say at the outset that trying to predict the exchange rate is an exercise in futility, but there are drivers which may help clarify the question.

 

  • The Rand exchange rate is heavily influenced by the exchange rates of other emerging markets and commodity producing countries. This was evident when the uncertainty about China caused exchange rates of a number of countries to worsen in response to the fall in commodity prices
  • The exchange rate is also influenced by money flows into and out of the country. These flows are partly foreign money coming into the country to earn higher interest rates, or perceived stock market growth opportunities. Outflows occur when foreign investors see better opportunities elsewhere. This was the case recently when Japanese investors sold massive amounts of currency out of investments in bonds, where they had been earning good yields and the Rand fell dramatically over a few days
  • Our political activities are also a cause of Rand volatility. This has not always been the major factor, but Nenegate in December did have a major impact. We have seen commentary that suggested the Rand weakened by R1 to the US$ as a result. This would amount to around 6%.

Will the Rand strengthen or weaken?

 

  • A recovery in commodity prices should help the Rand strengthen. Commodity prices move in cycles, so an improvement can be expected. However, given that the last cycle was boosted by Chinese growth, and China may well take some time for its purchasing to restore to previous levels, an upturn in the cycle may not happen for at least a year
  • The Rand, as an actively traded emerging market currency, often over-reacts on the way up and the way down. A collapse in the Rand in the mid 1980’s, 2002 and 2009 were followed by massive recovery in the following 1-2 years. Will the same happen to the late 2015 collapse?
  • A factor which we think will impact the value of the Rand in 2016 is the possibility of a credit rating downgrade for South Africa. This is underplayed by many, but if it happened could cause substantial currency out flows, a drop in national morale and an increase in government debt servicing costs and inflation.

We have heard various views that the fair value of the Rand should be in the range of R12-R14 to the US$. This would seem to make sense, subject to the credit rating uncertainty and the behaviour of our government.

 

So, you need to make your own guesses. Will the pattern of Rand recovery follow past history or will a drop in credit rating and political moves overshadow a recovery?

If you’re optimistic you may wish to wait before converting local investments into offshore based investments, but if you’re pessimistic, you should probably move sooner, and not try to time the exchange rate.