How low can the rand go? image

How low can the rand go?

27th March 2017

In January last year it seemed like it was all over for the rand. Fifteen months later and it’s one of the best performing currencies in the world. Many South Africans are wondering whether they should be taking money offshore, and whether the rand could strengthen even more.


Why is the rand so strong?

The exchange rates seen in January 2016 were largely based on an expected credit rating downgrade which never happened.

The rand was the most popular currency to bet against in 2016 – but at some point, all those speculators who bet against the rand had to buy them back.

Exporters need to repatriate money to run their businesses. Even if they have a negative view on the currency, they still need to keep buying rands and selling foreign currencies.


Can it go lower?

It could. Trends often stay in place until a big enough event occurs to reverse them.

Fair value for the rand is estimated at anywhere from 11 to 13 against the dollar, so it has some way to go to reach the lower end of that bracket.

Interest rates in SA are much higher than anywhere in Europe or North America. This means investors can borrow dollars, euros and pounds cheaply and earn much higher returns by buying and holding rands.




What might cause it to weaken again?

Political events are the biggest threat to the rand. A credit downgrade, a cabinet reshuffle, change in ANC policy and the leadership contest within the ANC could all cause investors to sell the rand again. Some of this is already priced in, but there would still be an impact from any of the above.

Eventually a strong currency will affect exporters to the extent that the fundamental value of the rand will change. This may take years rather than months though.

If the US Central Bank unexpectedly decides to accelerate its rate tightening cycle, that would also cause higher yielding currencies like the rand to come under pressure.


Is this a good time to take money offshore?

Current levels are a great opportunity to take money overseas when you consider the big picture. Yes, the rand may strengthen more – but when you look at the political risks and where the currency has traded in the past three years, the current level is a bargain.


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