I was at lunch recently, with the Joburg intelligentsia, and the conversation went something like this:
“Perhaps we should just sell up and send the money offshore. After all, Zuma and his ANC lackeys are destroying the Rand and, you know, hyperinflation.”
Which upset me. For two reasons:
- I’m pretty sure that the ZAR depreciation isn’t really the ANC’s fault; and
- Depreciation does not equal hyperinflation.
I’m going to save the “hyperinflation” part for another post, and focus on the ZAR depreciation.
Firstly, Some Statistics
Because it’s important to establish some perspective.
- Based on the Bank of England’s Forex Market Survey last October, the UK Foreign Exchange Market does about $29.2 billion worth of exchanges every day (every day) between US dollars and South African rands (here’s a link to the report, and you’re looking for Table 4).
- Based on the last Triennial Central Bank Survey of Forex Markets (conducted by the Bank of International Settlements back in April 2013), daily trades between US Dollars and South African rands were about $51 billion per day (here’s the link to that report, and you’re looking for Table 3).
- More than half of the total ZAR Forex daily trades take place in foreign currency swap instruments (check out Table 5 in that BIS report). And it’s almost two thirds if you include standard forward contracts (but I’m excluding those – because you don’t speculate on currencies with forwards – you do it with swaps).
And here’s a quote from this article (published with 2013 numbers, over the 2014 numbers I mentioned earlier):
Currently, the rand is the 16th most traded currency in the world, with BIS statistics reporting some $27 billion worth of it handled every day. Roughly 55 percent of the currency trading is done offshore, primarily in London, with around 45 percent onshore, mainly in Johannesburg.
What that implies:
- Every two weeks, the forex market for rands turns over the entire South African economy.
- And that rate is increasing.
- More than half of those daily trades take place in the UK – without ever touching South African shores.
- And more than half those daily trades are speculative.
The next question: and what exactly are these speculators speculating on?
- Investors use the South African Rand as a proxy for emerging market currency exposure, as well as for indirect exposure to the gold and platinum markets – and the rise and fall of the Rand is based on the global demand for risk and those commodities. Or:
- Investors want to expose themselves to Nkandla, e-tolls, and just how good Thuli Madonsela is at her job.
If you want a personal view, it’s this: the only people that really care about South African politics are South Africans.
The majority of ZAR traders care about:
- Global risk appetite for emerging markets
- The Platinum Price
- The Gold Price
- China’s demand for those commodities
- The type of setlement system used in ZAR trades
- Market liquidity
- A South African government that doesn’t interfere in any of the above
Here’s a graph of the ZAR-USD exchange rate:
Let me ask the following questions, in all seriousness:
- Do we honestly think that the sudden Rand depreciation in 2001/2002 was due to Thabo Mbeki and his ill-advised HIV policies, and the whole thing just happened to coincide with a global panic in the wake of 9/11?
- And the sudden Rand depreciation in 2009… it was Zuma coming to power and had nothing to do with a global financial crisis? And the subsequent recovery was the world sighing in relief at Zuma not doing too badly – that gold price bull rally was just, you know, a side-show?
- Oh, and the recent Rand depreciation is just the country going to the dogs – we’re not at all affected by the Fed ending its QE program…
Despite the facetious tone – I’m not saying that ANC policies and Eskom have no impact at all on the Rand.
But I am saying that, in the grand scheme of things, the impact is probably marginal – unless they try to interfere with Central Bank policy and/or destroy the mining sector.
And because we’re talking about speculation, here is mine:
- The recent Rand depreciation is mainly being driven by global uncertainty, general risk-aversion, and by weak gold and platinum prices.
- Some of it is being driven by energy worries. But the general depreciation has been going for some time now.
- So when the risk appetite returns, and the gold and platinum prices recover, the Rand will as well.
*sits back and waits for criticism*