The rand does not always perform as expected, thanks to the US dollar, to which we should always pay close attention Rand strength almost always surprises the market. The large spread between SA interest rates and US or other developed market interest rates indicates that the market expects the rand to weaken consistently against the dollar and other developed market currencies.
By the close on July 18 this spread for 10-year money was 6.43%. To put it another way, the rand was expected at that point to lose its exchange value versus the dollar at the average annual rate of 6.43% over the next 10 years.This difference, or interest carry, is also by definition the annual cost of a dollar or euro to be delivered in the future. And so, the forward rate of exchange for the dollar-rand to be delivered in a year or more always stands at a premium to the spot rate. This year, the daily interest spread on a 10-year government bond has varied between 6.4 and 5.94 percentage points, while the dollar-rand has varied between a most expensive R13.20 and a best of R12.42, using daily close rates of exchange. It should be noted in Figure 1 that, while the interest spread or expected exchange rate has a narrow range, the two series move together — a stronger rand leads to less rand weakness expected (a smaller spread) and vice versa. Another way of putting this point is th...
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