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Why is the Rand so Volatile at the Moment?

By Bidvest Bank
24-04-2016
Part One in a Two-part series

It’s easy to feel panicked about how volatile our currency is at the moment. And it’s even easier to blame it on our politicians. While recent political events have definitely had an impact on the Rand, there are many other factors at play that help to give context. It’s also good to take a wider worldview that it’s not only the Rand that’s currently volatile – most other currencies are too.

Although things are currently very tough, this is because we’re at the bottom of a business cycle. Typically, when interest rates start rising again, a currency moves its way up out of the “trough”. And with interest rates currently rising in the US, world growth should hopefully follow, which would positively impact on us here in South Africa. 

Here are a few external reasons why the Rand is currently so volatile:

1. Emerging Markets and Commodity Currencies

Our economy is normally grouped together with other Emerging Markets (EM) or commodity currencies like the Canadian and Australian Dollar. 

A commodity currency is one where that country’s economy relies heavily on exporting raw commodities, such as gold. Commodities are coming down in price at the moment because of weakened demand, and because of the slowdown in China. This weakened demand worldwide has led to negative sentiment, which has had a detrimental effect on Emerging Markets like ours.

2. Federal Rate Normalisation

Since 2008, the United States Federal Reserve Bank has kept interest rates low to prop up their economy, which has affected the rest of the world. They have also been printing more money in what’s known as Quantitative Easing (QE). Recently though, they’ve begun to normalise interest rates, so instead of printing more money – they are now pulling it out of the system. With less money in the system, US banks can’t lend as much. 

When Janet Yellen, the President of the Federal Reserve Bank, recently announced that they would start normalising interest rates, we all suddenly got weaker currencies, as no one wanted to be the last to buy the US Dollar. The US Dollar is always considered a safe bet, while currencies like ours are riskier.

Although having a weak currency should be an advantage because of exports, the problem is that countries like ours can’t gear themselves up really quickly to take advantage of the weaker exchange rate. Red tape, strikes and other factors mean that there is a lag and this also impacts on our economy. 

3) China slow down and Yuan rate manipulation

The Chinese economy has been growing at a rapid rate but has recently slowed, coming down from GDP growth of 10% to around 7%. Although this is still a very impressive number, the trend is really worrying, as China has become such a big player globally. 

China is therefore manipulating their currency, the Yuan, as they want it quite weak so they can remain a powerful exporter. With this happening, other currencies are following suit, resulting in an overall weakening.

4) Europe has gone into negative interest rates

The negative interest rate policy in the Eurozone is evidence that monetary officials have had to resort to extreme measures to try and boost a flagging previously economic powerhouse.

This has sparked fears in the markets, as everyone has seen how this policy has not positively impacted on growth in the past as opposed to what was predicted. This is making the market even more cautious, which in turn affects emerging market currencies like the Rand.

Keep a look out for our final article in this series, on internal reasons why the South African currency is so volatile.

With the Rand fluctuating so much, it can be difficult to plan any overseas trips. Not knowing how much your money can buy you, makes it much harder to budget. That’s why the World Currency CardTM is a good option – it lets you pre-load your card with up to 17 currencies at a fixed rate, giving you peace of mind that your budget won’t be blown, and your memories of your trip are happy ones.