HOT TOPIC | ZAR Under Pressure
The South African rand has been under severe pressure in recent days due to a combination of domestic and global factors. It's difficult to believe that the exchange rate to the dollar is around R19.40 today compared to R11.50 at the start of 2018 – just a mere five years ago. Below is a graph showing the currency fluctuations since 2018.
Looking at the graph from an investment perspective, it is evident that taking money offshore has proven profitable. But it is also apparent that making the same investment needs to be done at the correct levels as the Rand can quickly correct itself. The passage below will highlight why the South African Rand has been on th back foot against major currencies and its emerging market peers. Global Factors South Africa arms-to-Russia deal – accusations in a news report stated that South Africa had provided arms to Russia. Local news website, News24 cited the U.S. ambassador to South Africa as saying that Washington was confident that a cargo ship that docked in Simon's Town naval base in Cape Town in December had loaded weapons and ammunition before the ship went back to Russia. Prompting fears that devastating sanctions may be imposed from the U.S. High-interest rates in developed markets: the risk-free rate is defined as the U.S. Fed interest rate. Due to current world inflation and high levels of uncertainty, these rates have risen astronomically to 5.25% today, causing a strong dollar as investors move money back to the U.S. Emerging market currencies have struggled on the back of this. Grey-listing in March - for falling short of some international standards for combating money laundering and other financial crimes. Local factors Eskom Woes: Koeberg station maintenance would take longer than expected. The country is currently experiencing Stage 6 load shedding. South African Reserve Bank (SARB) Actions – due to the current ZAR weakness, the SARB may be forced to increase rates more than expected to keep the currency intact. The Forward Rates Agreement market is now pricing in possible 75 to 100bps hikes this year. SA Bonds Sell-Off – the negative sentiment from all the above points is causing foreigners to sell local bonds. South Africa's sovereign dollar bonds fell as much as 2.6 cents in the dollar or sold almost R7 billion worth of bonds on 11 May. The market is worried about stagnation in the local economy, and investors do not want to invest in a country with a poor short-term outlook. The underperformance of other currencies has been widespread.
Despite all these factors it is important to note that we have seen such aggressive moves in the currency before Nenegate, Coronavirus to name but a few but as one of the most liquid currencies in the emerging market world, the rand tends to over-react in the event of bad news and then revert back to its mean. It's important that investors remain the course and ensure they have diversification between asset classes, currencies, and regions.