The South African rand hit its weakest level in over a year this week, on the back of a stronger dollar and surging US inflation – brought on by the pandemic.
Riskier assets have also been shaken up in recent days amid surging Covid-19 cases in Europe and renewed restrictions, dousing investor hopes of a quicker recovery in consumption and global growth. US inflation data is at its highest point in nearly 30 years, which is likely to jolt the Federal Reserve into raising interest rates.
While the rand edged towards the R16/dollar mark on Wednesday afternoon – a key resistance level – financial services group Absa forecasts the rand to reach R15.25 by year-end rising gradually again to R16.00 by the end-2022.
“The exchange rate is likely to weaken gradually versus the resurgent dollar, but South Africa’s current account surpluses provide some buffer against global shocks,” the bank said in a note. “Nonetheless, we believe that weaker export commodity prices and rising import demand will lead to South Africa’s record current account surpluses softening into 2022.”
It added that the South African Reserve Bank has commenced its tightening cycle earlier than it expected, but stressed that the pace of normalisation would be gradual.
“We view the Monetary Policy Committee’s move as a pre-emptive measure to bolster its credibility and firmly anchor inflation expectations in the face of higher upside inflation risks, than because of any manifest pressure in core CPI. We now expect the SARB to hike in 25bp clips at alternative meetings taking the repo rate to 5.25% by end-2023.”
Year-to-date change in interest rates by country
As consumer prices rise and interest rates are increased, currency volatility once again becomes an important element to consider when trading, said Bianca Botes, director at Citadel Global.
If underestimated, it could lead to potentially negative consequences for some investors. However, this higher volatility also creates more opportunities for traders with their resultant larger price moves, she said.
“It is important for traders to be familiar with a currency’s volatility since different levels of volatility are more suitable to specific strategies and psychologies,” she said.
“Currency pairs with lower volatility are more favourable for those wishing to grow capital steadily without assuming major risks, whereas currency pairs with higher volatility are more likely to be sought after by risk-hungry traders who aim to cash in on greater price differentials.”
The US dollar and the rand are considered among the most volatile currency pairs, Botes said.
The rand is a commodity-driven currency, the value of which fluctuates in accordance with supply and demand. Despite not achieving the average daily forex turnover of major currencies such as the dollar, the euro or the pound, the rand’s value still classifies it as one of the top 20 global currencies, she said.
“Volatility is impacted by various political, economic and social circumstances and events. Both the local and political environment have a direct bearing on a currency’s volatility, which is one of the reasons why emerging market currencies tend to be more volatile due to uncertain or unstable political and social landscapes,” said Botes.
Central bank policies are another factor. Local interest rate hikes are seen as rand-positive, while interest rate cuts are deemed negative. International interest rates also affect the attractiveness of rand-denominated investments, she said.
“An obvious element influencing volatility is both local and international economic performance and a prime example of this is the instability surrounding the reliability of South Africa’s power supply, which currently has a negative impact.”
At 16h00 on Wednesday (24 November), the rand traded at the following levels again the major currencies:
- Dollar/Rand: R15.93 (0.58%)
- Pound/Rand: R21.27 (0.20%)
- Euro/Rand: R17.85 (0.21%)