On Sunday, I was out for lunch. And as seems to happen more frequently these days, I was asked about where I think the Rand is headed. I don’t really like this kind of question, because who knows really?

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Made in China

But I have written about superforecasters before, and if I were a superforecaster, I think I would be saying something like this:

The current “state of the nation” has left the Rand vulnerable. Emerging market currencies are always affected by global influences – but the domestic market can act as an anchor if it’s strong and well-governed. Currently, the South African economy is heavily reliant on the mining sector, has some serious infrastructural concerns, and seems to be suffering from a bipolar disorder – torn between socialist and crony-capitalist policy initiatives. So the missing anchor means that the Rand is freely adrift on the tides of global money flows – and the future of Rand is going to be determined by the same forces that are driving those global money flows. And there are two primary factors at play right now:

  1. The actions of the Federal Reserve; and
  2. The market perception of where we are in the commodity cycle.

As the Fed moves to hike interest rates, the emerging market currencies will continue to weaken – and to be honest, this is already being priced in.

That impact can be offset by a reversal in the bear market for commodities.

I guess what I’m really saying is that bets on the Rand at this point are really just bets on the commodity market. If you think that it’s bottoming out, then we’re in for a better year. If not, then not.

And if somewhere in between, then the Rand will continue to weaken until the commodity cycle turns.

If I really were a superforecaster, I guess I would also be attaching some probabilities to that. So let’s say that the most likely scenario is that the Rand will continue to weaken. And if more concerns about China crop up, which will almost certainly happen given how sino-skeptical we all are, then the Rand will have an even tougher time.

I’m sure that I’m over-simplifying it. But there it is.

If you’re interested in hearing a bit more from people that do this for a living, I strongly recommend two episodes of the ZAR podcast:

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.