The rand nosedived in a week of turmoil, but how did we get here and where are we going?
On 24 February 2022, the day that Russia invaded Ukraine, the rand was trading at R15.42/$. Since then, the local unit traded some 6% stronger, dipping below R14.50 at one stage. That the rand could maintain such strength in the face of local pressures such as a record unemployment rate of 35.3%, soaring fuel prices, the domestic electricity crisis and a factionalised ANC, indicates that it had been taking its cue from external factors with the key tipping point being the Russian invasion of Ukraine.
Commodities and the trade balance
The war in Ukraine has been a big driver of forex markets, especially in commodity-based developing countries, propelling commodity prices higher. Paradoxically, this has had a positive spin-off for the rand as the higher dollar inflows resulted in an improved trade balance and significant rand strength.
Not only that, compared to other emerging markets, South Africa maintains a relatively low exposure to Russia in terms of trade and investments, so traders have been rolling out of positions in countries such as Turkey and Egypt and into countries such as South Africa, Brazil and Argentina.
Rising prices
The soaring commodity prices might have boosted SA’s trade balance, limiting any negative effects of the war on our economic growth, but they have pushed inflation to the top end of the central bank’s tolerance level. Significantly, the higher oil price feeds through to most goods within the South African economy and dents consumer confidence.
At the same time, our imports from Ukraine, notably wheat flour and other cereals, are under pressure, leading to further food pricing pressure. South Africa imported US$34.051 million from Ukraine in 2020, $14.40 million of this being cereals, although this is a far cry from the nearly $180 million level of 2012.
Monetary policy tightening
With inflation on the rise, monetary policy continues to tighten. The interest rate environment going into the Russia-Ukraine war was already in a tightening cycle and South African yields are currently among the most attractive relative to our emerging market peers.
The expected SARB rate hikes have also been supporting the rand, even with growth for 2022 expected at only around 2% or lower.
But all good things come to an end …
The collapse, when it came, was swift and merciless. In the week after Easter, the rand gave up almost all of its gains for the year, slumping by 6% in four days and .
A perfect storm
A confluence of several factors saw the sudden currency collapse:
How long can this go on?
On a fair value basis, the rand had been moving towards overvalued levels, which it historically it hasn’t been able to sustain.
However, the drastic and sharp weakening is unlikely to be sustained. The possibility that the US Fed will disappoint at its next rate meeting in May would support the rand. The local unit does feel toppish, and a consolidation is expected. We expect to see a range of R15.00/$-R15.75/$ in the short term.