The currency markets are always on the move. These are some of the factors that most commonly impact the South African rand.
South Africa follows a fluid exchange rate regime that’s governed by the supply and demand market forces. Major international market activities significantly affect the exchange rate of the South African rand.
Fun fact: the word “rand” comes from “Witwatersrand,” a high escarpment on which the South African capital, Johannesburg, is built.
As with any other currency, the balance of payments, inflation, interest rate, and investor confidence also affect the rand. However, because it is a floating currency, its value changes constantly. Here are some of the factors that most commonly affect the rand’s value.
The economic and political stability of South Africa’s trading partners affect the Rand. The top export destination for South African products is China. Therefore, China’s political and economic climate tremendously influence the performance and value of the South African Rand.
According to the Wall Street Journal, in 2015, six months after chaos erupted in Chinese markets, the South African rand fell steeply and lost 26% of its value. By the beginning of 2016, the rand had fallen by 2.8% to trade at 16.78 against the dollar.
In 2015, the People’s Bank of China devalued the yuan by 3%. Share prices declined sharply because of a slump in the Chinese market. This market instability caused massive losses in global markets because China is the world’s biggest commodities' consumer. Metal prices went down, greatly affecting the South African rand as South Africa is a major exporter of platinum and gold.
Uncertainty in the global markets can lead to frequent fluctuations in currency values. Here are just a few examples of global events in the last decade that have impacted the rand:
In 2018, a diplomatic spat between the US and Turkey caused an economic fallout. This tremendously affected the rand’s value. It went from R13.41 to R15.55 within a month.
Between May and June 2013, the rand dropped from R8.91 to R10.37 because of the taper tantrum. That year, the rand lost about a quarter of its value when Ben Bernanke, the Fed chair, made a surprise announcement that the US central bank was scaling down the amount of money it invested into global markets.
The 2012 panic about Greece exiting the Eurozone—“Grexit”—just before the elections in Greece caused the rand to drop from R7.69 to R8.71.
In 2011, the Eurozone crisis was still ongoing, but the EU had already approved a bail-out package for Greece. Investors ditched emerging market assets, such as the Rand, because US bond yields rose above 3%. This lowered the Rand’s value—from R6.62 to R7.6—within one month.
During the financial crisis of 2009, the MSCI (Morgan Stanley Capital International) World Index lost over 9%. The rand went from R9.53 to R10.73 between February and March 2009.
The US housing crisis in 2008 lowered the value of the rand from R8.05 to R11.87. There was a lending crisis because financial institutions gave large mortgages to borrowers who couldn’t afford them. Banks bought off these worthless mortgages, reducing consumer confidence in the financial sector and causing it to collapse. Investors sold off risky assets in developing markets and invested in the United States dollar, which gained massively during this time.
South Africa is a major commodity exporter. It is the largest platinum exporter globally. Its GDP is $351.4 billion USD with a GDP per capita of $6,001.4 for the year 2019.
The rand is a commodity currency. A commodity currency is also known as a "commodity dollar" or "comdoll" because its value is directly impacted by the price of raw materials.
Goods such as agricultural products, metals, and energies can affect the values of commodity currencies. When the price of the country’s main commodity fluctuates, the currency’s exchange rate follows suit.
When South African exports are in high demand, the rand’s value becomes stronger. If there’s less demand and an abundance of supply, the result is a weaker rand. Investors consider a strong trade industry to be a catalyst for a well-performing currency.
South Africa heavily relies on mineral exports. It's the world's largest producer and exporter of platinum, chromium, and iron ore. The country also exports diamonds, manganese ore, cars, gold, and delivery trucks.
The exporting of these commodities abroad generates a major portion of the country’s GDP. Financial experts commonly peg the value of the rand on the prices of these exports.
In forex trading, the South African rand (ZAR) is usually paired with the US dollar (USD/ZAR). Since the mining industry is very important in South Africa, the USD/ZAR currency pair shows a correlation to pricing trends in metals. This includes metals such as diamonds, coal, platinum, gold, chromium, and Iron ore.
Low commodity prices weaken the rand. For example, in 2014, China experienced slow economic growth and its demand for commodities reduced, negatively affecting global commodity prices. The rand’s value went down because China is South Africa’s largest trading partner.
The ZAR struggled to maintain its value during the 2008-2012 gold bubble burst. The USD/ZAR pair experienced a steep downtrend when the price of gold plunged. This demonstrated its connection to gold commodity pricing.
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