Rand recently hit R17 against the US dollar; will it get worse?
The Rand has weakened significantly over the last couple of weeks against the US dollar. As a South African we are quick to look internally and assume it is due to SA specific issues that the rand is weakening. But if we dig a bit deeper, we can quickly see that all global currencies have depreciated against the US dollar over the last couple of months.
The Rand has weakened significantly over the last couple of weeks against the US dollar. As a South African we are quick to look internally and assume it is due to SA specific issues that the rand is weakening. But if we dig a bit deeper, we can quickly see that all global currencies have depreciated against the US dollar over the last couple of months.
As highlighted in the table below all major currencies have weakened against the USD. Why is this? The main reason behind this is the worry about inflation which in turn will lead to higher interest rates, specifically in the US.
Over the last couple of years, it was relatively cheap to borrow money in the US as interest rates were at all time lows. Their main interest rate was close to zero which meant that investors can practically borrow money at no cost. In turn, this lead to investors borrowing money and investing into capital markets, in the hope that the investment returns would outweigh the cost of borrowing. This resulted in certain asset classes becoming inflated, especially high risk/speculative assets such as bitcoin. It also led to investors looking for opportunities offshore.
As investors start to unwind these investments, they withdraw capital from markets around the world like SA and Europe, causing these currencies to depreciate.
The bigger question is willing this trend continue?
As we can see from the graph on the previous page the rand has reached similar levels before and tends to revert to its long-term mean.
As an example, if an investor took money out when the currency was it its weakest in 2020 it went R18,94, R1000 taken abroad would have delivered USD 52,79. If the investor brought the money back on 2021/09/10 when the currency was R14,15 the money would only be worth R747.
This is dual fold. It is cheaper for foreigners to buy SA goods like commodities such as Gold and Coal, but it is also more profitable for local producers to export such products. Thus, there will be an increase in demand for the rand and over time will let the rand appreciate again and move to a fairer value as currencies work on a balancing scale as demand and supply changes. It is important to note that in times of uncertainty (like we have today with heightened global inflation and geopolitical tensions), the US dollar flexes its muscles and strengthens as it is seen as a safe haven currency.