2019 saw a surge in emigration statistics, stage 6 load shedding and business confidence bumping along 20-year lows. South Africa is just one notch away from a downgrade to junk status. 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. Opening the year around R14.38 to the Dollar, and moving to 15.50 around August, it ended the year at R14.00. 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.
Currency can be a reflection of the underlying health of the country and its finances, but there are also other factors. One example is the carry trade which is borrowing in one currency that has a low interest rate and investing in another with a higher interest rate. South Africa is offering one of the highest real yields in the world at around 5.5%. Other countries like Brazil, Russia and Turkey are offering around 3.6%, 2.8% and 1.7% respectively. Does South Africa have issues? Most definitely. Do other countries not have issues as serious as South Africa? They do, yet our yields are significantly higher.
This is even more important in the context of many countries offering negative real yields and even negative nominal yields. If you want to protect your money, maybe you could live with a negative yield by being in a ‘safe’ country. The problem is if you have liabilities that you need to service, these liabilities are not going down, they are going up as in the case of pension funds. If you are getting a negative return on your assets but have to service liabilities growing at 3%, 4%, 5%+ then maybe yields in ‘less safe’ countries begin to look attractive. In that case you need the currency to buy them which creates demand for that currency and currency strength.
The US Dollar has also been strong relative to other currencies. May 2013 was the last time the Australian Dollar was 1 to 1 against the American Dollar and since then it has depreciated 44%. Over the same time period the Rand has depreciated 47%. This is not to say that the depreciation rates are the same over all time periods and Australia as a country is in the same position as South Africa, but a 40%+ depreciation of a currency is notable for any country. However, I am not sure the Australians even noticed. The possible reasons for their currency weakness are numerous. One explanation could be their reliance on resources over a time when resources were weak which contributed to this depreciation, but much of it could simply be US Dollar strength. The point is that a currency is valued relative to another currency. This means its value can change for no reason other than the currency it is measured against has changed and in this case the US Dollar got stronger.
So, a big part of the question of how the Rand will do against the US Dollar is simply how will the US Dollar do? Given the amount of stimulus they have used and the amount of obligations they need to meet there is certainly a case to be made for the Dollar to weaken from here. The details and mechanics of this are beyond the scope of this article but simply put a weaker Dollar would mean a stronger Rand.
In terms of answering the title to this article, I’m afraid there is no crystal ball and no clear answer. South Africa has major issues to address and if this was the only factor determining our currency then perhaps the Rand should be significantly weaker. This article simply serves as some food for thought and perhaps a warning to not place any currency trades on Monday morning after watching Carte Blanche on TV on Sunday night.