Understanding the Drivers of the ZAR
Over the past couple of days, there has been a notable turnaround in the fortunes of the South African rand. For several months, this emerging market currency has lost significant ground on the back of a strong US dollar, weak economic data from China, and a slump in global commodities prices. The South African economy is heavily impacted by the performance of its energy and mining sector, with copper, gold, platinum, silver and coal mining forming a substantial component of South African GDP. According to the most recent estimates, industry forms 31.6% of the GDP while agriculture forms 2.5% and services 65.9%.
In August 2015, South African exports declined to ZAR 86,631.76 million from a July figure of ZAR 93,084.33 million. This forms part of a global trend in exports, led by a meltdown in Chinese equities. That we have seen year-on-year import data from China declining by 20.4% in September is no coincidence – this is especially noticeable in the export data from leading EM countries like South Africa. Exports of iron and steel form the bulk of South Africa's economic activity, with exports to Asia topping the list at ZAR 20,235.93 million as at January 2015. Europe is South Africa's next largest export market, followed by Africa.
How is the Rand Performing?
The performance of the South African Rand in October 2015 has been noteworthy. At the beginning of October, the ZAR began trading at almost 14:1 to the USD. It has since appreciated substantially and was last trading at 13.09:1 on October 16. This strengthening of the South African Rand has been attributed to multiple factors, including the following:
· The Fed's decision not to raise interest rates in September boosted emerging market currencies around the world, notably the South African Rand, the Brazilian real, the Turkish lira and the Venezuelan bolívar
· That the US economy is strong enough to sustain a rate hike, but the Fed decided against it because it is concerned about the impact a rate hike would have on the global economy has also caused doubt among market participants
· A slew of weak economic data from the US, notably retail sales, and jobless claims helped to drive dollar weakness and propel EM currencies
· Ongoing high-level negotiations on a megadeal between SABMiller (L:SAB) and AB Inbev (N:BUD) is said to be worth $100 billion and will be the biggest corporate merger if it comes to pass
· The likelihood of a Fed rate hike in 2015 has dropped from 41% in September to 27% in October – this bodes well for emerging market currencies like the South African rand
Such is the positive sentiment about the rand's short-term recovery that equities markets have retreated as expected. The USD/ZAR currency pair was trading at 13.07, the GBP/ZAR was trading at 20.25, and the EUR/ZAR was trading at 14.95. With such strong appreciation against a basket of currencies, South Africa will be able to pay less for imports, but it will invariably suffer a decline in exports as foreign buyers are now paying more for South African-produced commodities. Presently, US economic data is perceived negatively, and a short-term rally in EM currencies will take place for as long as the Fed decides to maintain interest rates in the 0.00% - 0.25% range. There are several hawks in the Fed pushing for a rate hike in 2015, but caution is the order of the day for the worlds #1 economy.