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Investors can’t trust what they think they know about the rand

The currency is rarely what it seems.
For one thing, the rand is traded on global markets that have many other, less emotive, concerns. Image: Waldo Swiegers, Bloomberg

By the end of 2018, the rand had lost 54% against the dollar in just eight years. Since the start of 2011, when it was trading at just over R6.60 to the US currency, it had declined by an average of around 5.5% per year.

It had been accompanied on this slide by other emerging market currencies. The Indian rupee was down 35% against the dollar, the Mexican peso had fallen 37%, the Brazilian real 57%, and the Turkish lira 71%.

Over this time, perceptions about South Africa had similarly been in decline. Poor governance, massive corruption and policy uncertainty had left the country without any positive economic momentum.

Given this context, it would have been perfectly reasonable to expect the rand to fall even further against the dollar last year. On the surface, everything was pointing in that direction.

Yet, as 36One pointed out in a recent note to clients, this isn’t what happened.

“Local sentiment was not good at the start of 2019 and considering the additional negative news throughout the year, it got worse. Yet the rand ended the year stronger against the US dollar than it started,” 36One noted. “Opening the year around R14.38 to the dollar, and moving to R15.50 around August, it ended the year at R14.00.”

Rand vs US dollar over ten years


The local currency gained against the euro too. From R16.55 at the start of the year, it ended 2019 at R15.71.

Lesson No 1: Know what you don’t know

To the casual observer, this would seem incongruous. Particularly in South Africa, there is a common belief that the local currency is mainly a barometer of how well the country is doing. The fact that it fell substantially during Jacob Zuma’s presidency seemed to confirm this.

If this were true, however, there would have been no reason for the rand to strengthen during 2019. This was a year in which the country had to deal with Stage 6 load shedding for the first time, business confidence was at 20-year lows, and real economic growth was non-existent.

The reality is that the rand does not take its direction from the newspapers.

As 36One noted: “If it was a case of bad news means weak currency then a currency trader would be the easiest and most lucrative job in the world. However, the world of finance is far more complicated than that.”

There are a range of factors beyond what is happening in the country itself that influence where the rand goes. These include sentiment towards emerging markets as a whole, the difference between local and international interest rates, inflation, and the performance of the dollar.

This range of factors, and the interplay between them, makes it notoriously difficult to predict what the currency is going to do. In fact, at the start of 2019 a Bloomberg survey of economists found predictions ranging from the rand ending the year as weak as R16.50 to the dollar, to as strong as R12.75.

Read: JPMorgan, Nomura in opposite corners on rand 2019 prospects

The fact that professionals have such difficulty anticipating the rand’s movements should be an indication that this is not something around which anyone can claim to have much certainty.

To the average investor, the rand’s prospects are something that you should accept that you just can’t know.

Lesson No 2: The markets don’t care how you feel

This is particularly the case because much of what many investors think they know is not informed by fundamentals, but by their own attitudes. We are all swayed by what we see happening around us, and how it impacts our views.

Read: What Trump’s presidency can tell us about the JSE

If we are concerned about corruption, maladministration and South Africa’s economic prospects, then we assume that the rand must reflect this. However, while these things may be immediate issues for us, they are not necessarily so for the currency.

The rand is traded on global markets that have many other, less emotive, concerns. In the current environment, one of the most obvious is that investors in most of the developed world are dealing with extremely low, and even negative, interest rates.

Pragmatically, they therefore have to look elsewhere for better returns. One of the places these are available is South Africa.

As 36One pointed out: “South Africa is offering one of the highest real yields in the world at around 5.5%.”

Even though there is a risk associated with bringing money into this country, many global investors will feel that they are more than being compensated for it. They are therefore continuing to buy local bonds, and thus supporting the currency.

This is why investors should be extremely careful about letting their view on where the currency is going play a role in their decision making. Not only is this unlikely to be something they can forecast with any accuracy, but often the views guiding their predictions are at best incomplete, and at worst quite removed from the fundamentals that are actually at play.



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I don’t understand any of this. But the 5.5% yield is what keep me investing.

Thanks Patrick. Good article.

Believe it or not, but the recent strength of the rand is due to ANC incompetence. We are not competitive in this global environment of competitive devaluation. We are losing the “currency war” and we measure the casualties in the form of declining tax recenue and rising unemployment.

We use high rates of interest to bribe foreigners to buy our bonds, to lend to the bankrupt Luthuli House in other words. We haven’t got any ammo left over to fight the currency war. Our socualist policies turned us into the global dumpsite for unemployment and social decay.

Being a slowly boiled frog myself, I am more concerned about the possibility of capital controls being in place when comes the time for me to hop outta here.

Wonder what advice one can get …Bring back money from overseas or not ? 12 month return on various platforms = 11% in $ . Elephant in the room is R vs $ .

The rand is 62% undervalued. The US Dollar has had a huge run against all emerging market currencies. SA is receiving more FDI this year, 2018 and 2019 than the previous 6 years under Zuma. Hello, if you are leaving now, you are a little late! Now you’re being a herder and listening to the noise. For those that can see past the noise, you will make money in SA!

U could say, the same about Zimbabwe right now aswell.
But for some reason I’m not interested.

62% undervalued??

Fantastic…thank you! I’ll then wait for the ZAR to improve to around R5,50/$ (..which is 62% down from current levels).

It may well be true that the Rand is undervalued compared to whatever (hamburgers?) but that does not imply it will revert to a “correct” value. It can stay undervalued for as long as it will, even longer than we will be alive (or solvent).

good article, as always.
Of 13 top economists,only one got it almost right on a 12 month prediction, and she admitted to it being a thumbsuck.
Thanks Patrick.

Absolutely correct about the danger of trying to predict the rate. Given a year or two window, you may be surprised at the level of the rand for better or worse.

Experts on TV (“You and your Money”) were saying that R14,00 is fair value based on pricing parity data.

If you follow Magnus Haystack you will know that our experts are under duress to paint a rosy picture of SAs financial situation.

Follow who?

Keeping money offshore is not because you think the Rand will depreciate by a certain percentage this year or next. It is an INSURANCE policy for when the ship finally sinks.
The sinking of the ship has nthing to do with external fectors but everything with our own stupid policies and idiotic ANC government. IF they manage to follow through with these idiotic policies it is just a matter of time. EWC, BBBBEEEE or whatever the newest acronym is, NHI, Electricity pricing, and bailing out all 740 of the inefficient useless SOCs.

Precisely why we take as much money offshore as possible. Political risk. The difference between having some money or possibly none at all, as happened in Zimbabwe.

..and as happened in Mozambique (in their civil war period, when many Portuguese families fled to SA with only their clothes on).

Nice article. Still remember the days when every slip in the rand was being blamed on some hiccup related to Mugabe’s Zimbabwe. The analysis that promoted that linkage certainly seems discredited today!

Nobody cares short term, everyone is looking at long term.
In 1980 it was R0.78 to $1.
In 1990 it was R2.59 to $1.
In 2000 it was R6.95 to $1.
In 2010 it was R7.32 to $1.
In 2020 it is now R14.36 to $1 so far this year. Anyone else notice a trend here? I wonder what effect Eskom blackouts, bailouts, and other failed SOEs will have this year.

And in 1970 R 1.1529 / $

Yes the trend is obvious but the spikes matter if you are forced to re-balance your portfolio. For example when taking retirement or switching to a new investment house.

40 years ago my parents generation were no more likely to afford an overseas holiday than we can today. Ditto with affordability of buying imported electrical equipment, cars, TVs, washing machines, clothes and food. Ditto farmers importing tractors. Some people simply project irrational fear while ignoring the facts and likely trajectory of currencies, given global experience, cited in post below. Look at global experience of PPP

Bought 10 Kruger coins in 2003 for R28,000.
Sold all of them in 2011 for R110,000.
Bought second hand Corolla for R60,000, still going strong.
Invested in equipment (R50,000) for a home industry.
Home industry providing R8,000 pm profit from 2011.
Retired in 2006.
Every 5 months buying the smallest Kruger coin for rainy days (have 5).
The coins will provide for a bit of future inflation security.
At least I will able to sell and eat a little if and when the Rand will looses it’s value.

A Global perspective from one of the US foremost financial advisors
Regarding FX (and I don’t think people understand this):
“changes in countries’ exchange rates vs.the US dollar have been approx equal to inflation differential w/ the US over the same period…relative purchasing power parity has held to a reasonable approximation.”

Notice also the optimal ranges for local vs offshore graphs

My (extensive) knowledge of the Rand is as follows:

A R1-coin is 20mm in diameter; about 1,3mm thick, weights 4 grams…and made from nickel-coated copper.

A R1 is worth….err…uhm….quite a lot in Zimbabwe! (…and fairly easy to hit on a 50-meter gun-range with a scoped .22 rifle)

Ridiculing aside, one certainty of the ZAR is that its “average annual depreciation” is around 6-7% per annum, over the long term. It’s a function of SA’s interest-rate differential between our major trading countries.
So by having a foreign cash investment, earning almost zero interest, time will be on your side giving you at least a 6% return in rand (and having an offshore equity fund…even better. And without our sovereignty risk.)
But the rand-depreciation is never linear. WILL weaken long-term, it’s a given.

Hmmmm…..perhaps hope then for those who bought at R17/$ circa Jan 2016 ?

@SA-always. Of course it will, given sufficient time.

Same argument can be put forward back in mid-2008 (around the US sub-prime crisis) when exchange rate was around R7,70 to the US$. Jumped to just above ZAR10 to the dollar from Nov’08 (i.e. almost 30% drop in the ZAR at the time), then reverted back to R7,50 around Oct’09 almost a year later.

So what about the poor souls that bought USD as a R10 exchange rate at end’08? Knowing what the R/$ exchange rate today, have those that made such poor timing made up the difference as yet? 😉
For them, maybe not a great % return (considering inflation), but STILL GAINED….even when bought during disastrous timing of exchange rate.

And perhaps not too long-term, lest we all dead….

Dear Michael,
“For them, maybe not a great % return (considering inflation), but STILL GAINED….”
No, they did not gain. If they invested the R10 locally @ 7.5% interest per annum they would have today (11 years later) R22. Conversely, if they bought $1 for the same R10, their $1 would only be worth R14.50 today. Both are in TODAY terms, so inflation applies to both equally. One would also have to account for tax (interest and capital gains) but still, the local investment beats it in sheer monetary terms. U can even account for the $1 earning interest (miniscule)

The rand is weakening currency. South Africa needs to change its economy from an importing economy to a manufacturing exporting economy.

The rand will weaken on average about 10% a year against the US dollar.

Maybe, but I can trust what I know about the country. EWC, NHI , bye bye.

Retired. Don’t have funds to move overseas. Saving a little bit at a time, to increase my gold kruger portfolio as a hedge against inflation and rand depreciation and also a small monthly investment into Nasdac100 and S&P500 etf’s to counter the predicted future upheavals in the economy.

End of comments.





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