What’s happening in the currency market

The chart below shows the history of the ZAR against the USD over the past 20 years.

Chart: Historical view of ZAR strength

Notice how the ZAR is sometimes influenced by what is happening outside of SA (9/11, Global Financial Crisis, etc) and sometimes by what is happening inside SA (firing of Nene as Finance Minister). In fact, of the 5 major events where we see a spike in the ZAR, 3 of them have nothing to do with SA (Of course, this is a bit simplified as there are a multitude of factors that influence this relationship).

The black line on the chart is a modelled ‘purchasing power parity’ or PPP. It indicates whether the ZAR is undervalued (weak) or overvalued (strong).

• If the blue line is above the black line, it means the rand is weak and undervalued. For example, the rand was weak from 2016 to 2022.
• If it is below the black line, it means the ZAR is strong. For example, between 2002 and 2011.

Looking carefully at the chart we see the ZAR goes through long periods of strength (2001 to 2011) and long periods of weakness (2011 to 2022).

There are a myriad of factors influencing the ZAR, but I’d like to talk about one relationship in particular –the relationship between the ZAR and the price of resources.

We know that 1/3^rd of the JSE All Share Index is made up of our resources sector, and this sector has a major impact on the ZAR. When commodity prices are high, our resources sector does well. When the resources sector does well, the ZAR does well.

Let’s look at another graph of the ZAR, but let’s include the Copper price as a proxy for the price of all resources (prices of resources like copper, iron ore, platinum, etc tend to move together). The blue line on the chart below is the Copper price from 2001, and the green line is the ZAR to USD (read off the right axis).

Notice how the Copper price (blue line) jumps up from about 2002 to 2008, dips for about a year (a result of the Global Financial Crisis), and then stays high until about 2010. From 2010, it slowly declines until about 2016, at which point it starts to climb again.

Now, look how the ZAR has moved in relation to the Copper price – it strengthened when the Copper price rose until 2010, then weakened from 2010 to 2016 as the Copper price declined, then saw some strengthen post 2016 as the Copper price starts rising again.

Right now, the price of resources is elevated, and yet the rand is weak. The weakness happened over the past 2 years, or the exact same time the Fed began raising interest rates. Rising interest rates have made a stronger dollar which distorts the relationship between the ZAR and resource prices.

• Now that inflation is coming down, we are going to see the Fed begin reducing rates and the USD losing some strength.
• If resource prices remain elevated, and going on this trend, the ZAR is going to strengthen.

If the resources remain elevated, it is quite possible that we are on the cusp of another decade of rand strength.

To conclude, the ZAR is notoriously hard to predict in the short term. History shows it can remain strong or weak for extended periods of time. However, we know the relationship with the resource sector, and should these prices remain elevated, the ZAR will inevitably strengthen. Let’s hope this happens sooner rather than later.

Article by: Matthew Matthee a Graviton Advisor