As the Coronavirus Spreads, what has happened to our Rand?
The Rand seems to be sending shock waves in the South African market as it breached the R19/$ mark and seems on a trajectory to hit pass the R20/$ mark soon. To further add insult to injury we then got downgraded.
If you are a Forex Trading God, then this would be Heaven on Earth, but if you are just a mere mortal what does this all mean and why should you care???
Lets understand why we talk about a Rand/Dollar rate
When we compare one currency to another, we are effectively talking about the exchange rate. If the rand/dollar exchange rate is R20, then that would indicate that you would need R20 to buy $1. Ultimately it boils down to supply and demand of the dollar in the financial market.
What else influences the exchange rate? (as per the SARB)
The country’s status of transactions with the rest of the world, or its balance-of-payments – is a “direct determinant” of the exchange rate.
Apart from the balance-of-payments position, the exchange rate is also influenced by the difference in inflation between SA and that of its trading partners. If the inflation rate in SA is higher than that of its major trading partners or international competitors, domestic producers will lose their “competitive edge” and consumers might opt to import cheaper goods instead of buying local. “This will reduce South Africa’s exports while the demand for imports will rise, the demand for foreign currency will increase, foreign currency will become relatively scarce and more expensive, and the rand will depreciate against other currencies.
Why has the rand been weakening lately?
With the current epidemic and a global recession being eminent, investors are looking for a safe haven. Unfortunately, South Africa is an emerging market and during a crisis our market becomes very risky to have money in Rands.
The downgrade has also caused nervousness to offshore investors, as a downgrade indicates that we can not pay off our debts as a country.
Moving into a junk status also excludes us from the FTSE World Government Bond Index by the end of April, as the index does not allow junk-rated bonds. This will trigger a sell-off of government bonds.
Analysts in November 2019 predicted outflows of as much as between $8 billion and $12 billion, but this might be smaller, due to the recent market sell-off in recent months as a result of Covid-19 fears, Momentum Investments economists noted.
Most bonds that will be sold are held in Rands – Business Insider reports that investors will resort to selling Rands in order to take their proceeds out the country. This has already placed pressure on the rand, which had weakened more than 6% since the Moody’s downgrade.
What does all this mean?
A weaker rand means that there will be an increase in goods that we buy and more especially in items that we import.
Inflation will increase, and considering the current lock down, most employers will not be increasing staff salaries and there might be possible retrenchments.
Is there a silver lining?
Well now that depends on who you speak to. Some would look at it as doom and gloom and well, others might look at it as a prime time to make money.
New industries will grow, increase in offshore investments, the rise of the entrepreneur, a boom in the online market as more companies will go digital.
We as a nation need to start thinking out of the box.