The Rand is one of the most tradable and most liquid currencies in the world., let us not forget this. The Worlds financial markets are highly sophistacated finncial systems and when we consider that SA debt is denominated in ZAR and not in US$, it makes ZAR vulnerable to SA specific factors.
It has become a South African past time to value our country and comment on it’s stability by what the exchange rate is on the day. South Africa makes up such a tiny part of the Global financial system with our economy coming in at less than 1% of the global economy. This on it’s own would indicate that any major fluctuations in the USD ZAR excahnge rate would be asd a result of factors in the Global economy as opposed to the local economy. There is no denying that we have some challenges which our Government needs to attend to, but the affect of these factors on our exchange rate may not be as enormous as some think.
What are the factors that influence Rand Volatilty?
Global Macro economic factors have a major affect on ZAR volatility. US$ volatility is far more likely to have an effect on the Rand than load shedding for example. When there is global risk aversion, emerging markets will suffer and the ZAR is first to affected.
Commodity prices can have a profound affect on the ZAR. South Africa is a nett exporter of commodities and when commodity prices rise, like they have in recent times, our goods are cheaper and customers would likely increase order volumes to takle advantage of the lower prices.
Purchasing power parity PPP compares the buying power of currencies against a basket of goods and many have the Rand pegged as undervalued based on the PPP Index. Lets take for example a Global btrand like McDonalds, PPP would take the cost of a Big Mac in each country and look at the price differential. This Index is actually known as the Big Mac Index. To learn more about the theory, measurement and application of the PPP index click “Purchasing power parity” above for the Investopedia info. FYI, the Big Mac Index currently has the Rand undervalued by around 60%.
Will the Rand rebound to a more equal PPP level?
In the financial markets anything is possible with political and financial will but the local economy, World economy and local factors do not seem to support this.
Like any other investment, it is the lkong term view that one needs to take into account when deciding what position to take. Trying to time the markets is a mistake s o many make to their detriment and is more akin to gambling than investing. The long term view on ZAR would indicate that staying the course with a longer term view is the answer.
Tese are abservations made through reading investment news from various sources and is not financial advice. Please feel free to disagree, agree or simply comment with your own opinion.