The Rand: Reasons for the Fall and looking forward

The Rand weakened over 30% against the US dollar from mid-2015 till end of 2015.

The news headlines read: South African Politics, corruption and Nenegate is all to blame. Or is it?

Although locally there was a lot of headwinds, it was not the only reason for the 30% weakening. It can be attributed to 3 main factors as shown in graph below:

pj

So while SA specifics was the major contributor to the weak rand, it wasn’t the only reason.

More than 30% can be attributed to the Dollar Bull run that strengthened against all currencies.

Almost another 30% was due to the lower commodity prices and a weakening in commodity export countries’ currencies like Australia, Brazil and South Africa.

But more than 40% was attributed to SA specifically. The table below give us a clearer picture of the SA specific events that lead to the Rand weakening:

pj1

 

What to expect going forward:

 

Does this mean the Rand will go over R 20 in the next few months?

Depends if you read the newspapers or look at fundamentals.

 

If you compare PPP (what you can buy with R100 against the equivalent of R100 in USA) the Rand looks very weak. If you compare prices between South Africa and the US, the Rand should theoretically almost trade to R 10 to the Dollar. See the graph below:

pj2

Theory and practice does not always match and there is a lot of fear in the market that will bring extra volatility to the Rand.

We are not taking a bet on the Rand strengthening, but the possibility needs to be considered when choosing between investment options.

PJ Botha CA (SA)

 

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