Reason for rand’s volatility is its status as EM proxy
SA’s currency is the third-highest among its emerging-market peers, which makes policy making and forward planning for foreign-currency driven businesses very difficult
The rand’s wild swings whenever there is good or bad news elsewhere in the developing world is due to its status as a proxy for emerging markets (EMs), rather than to domestic factors, said Francois Groepe, the deputy governor of the SA Reserve Bank.
The SA currency is about the 16th most-traded currency globally, while the economy ranks at about 32nd or 33rd, Groepe told editors at a lunch in Johannesburg yesterday. Spot turnover in the rand is equivalent to about $4bn daily, while total turnover is as high as $17bn, he said.
“There is little doubt that the rand is a proxy because why would you have such a difference in the turnover of the currency relative to the size of the economy?” he said. “Often the currency moves in tandem with what’s happening to other EMs.”
The volatility of the rand, due in part to the liquidity of SA’s comparatively deep financial markets, makes forward planning difficult for businesses who pay their costs or derive their revenue in foreign currency. It also bedevils policy making as it is a significant inflation risk, according to the central bank.
The currency’s one-month realised volatility versus the dollar climbed as high as 26% during Turkey’s currency crisis in September, third only to that country’s lira and the Argentinian peso, according to data compiled by Bloomberg. Price swings have since dropped to 15.8%, still the third-highest among emerging-market peers.
The SA currency is heading for its best performance in November in 30 years, having gained 8.2% against the dollar. Still, it’s 9.4% down so far this year.