Tue, 17 Sep 2019

Q&A: What's behind the rand's severe wobbles?

23 Aug 2019, 22:13 GMT+10

The rand in recent weeks weakened to above R15/$, which analysts have attributed to international developments such as trade war talks between the US and China, coupled with local risks which have scared off investors, such as bailout announcements for Eskom.

Speaking to Fin24 by phone on Thursday, Alwyn Van Der Merwe - director of investments at Sanlam Private Wealth - said the local unit is a risk barometer within SA, and that its movements have been largely dominated by market perceptions of those risks.

Up until mid-July, the rand had been trading "broadly sideways" to developed market currencies such as the US dollar, euro and pound, he noted.

Van der Merwe shared his views on what sparked the turnaround in the rand's performance, causing it to trade around average levels of R15.20/$.

Rand weakens on the back of Eskom bail out

Unfortunately, there were also a number of risks that came to the fore locally, which scared international investors from investing in South Africa. The biggest one was the bailout to Eskom that President Cyril Ramaphosa announced at the State of the Nation address (in June). This bailout was quantified after Finance Minister Tito Mboweni told Parliament Eskom would need R59bn in the short term. That brought fiscal risk to the fore and the rand came under severe pressure.

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A lot of deviation between the actual value and the theoretical value of the rand depends on the investor sentiment of the day, which also depends on the Reserve Bank being able to maintain its independence in policy implementation.

The Reserve Bank must be able to continue to act on its mandate - which says they have got to protect the value of the currency. If the monetary policy is aligned to keep inflation under control, then the rand shouldn't go into freefall.

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What are your expectations for the value the rand will reach by year-end?

It will be a guess. I would think we had so much bad news, late in July and August and a lot of that is priced into the currency. Depending on the outcome of the Moody's review at the end of the year, I guess the rand would trade around these levels - around R15/$.

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