BUSINESS NEWS - 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.
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.
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.