The South African rand is experiencing a period of remarkably low volatility, with its trading range against the US dollar shrinking to levels not seen in over two decades.
Hakeem Philander, Asset Class Solutions Specialist at RMB said: “This unusual stability, despite the rand trading near its weakest historical levels, suggests a significant change in its risk profile.”
Last year, the USD/ZAR exchange rate saw its smallest trading range since 1999.
This means the rand's value fluctuated less than it has in years, even during times when it was at a low point.
“To put it simply, the rand's ups and downs have become much smaller and less frequent,” Philander noted.
“But this drop in volatility isn't happening in isolation. It mirrors a broader trend in the global currency market. Major world currencies, like those of the G7 nations and other emerging markets, have also seen their volatility decrease. In fact, global emerging market currency volatility hit an all-time low last year. This global trend is a major factor influencing the rand's behavior.”
However, while global factors play a big role, there are unique aspects to the rand's situation.
Most notably, the cost of insuring against extreme rand weakness has reduced significantly. This suggests that investors' perceptions of the rand's risk have fundamentally changed.
Local Asset Managers as a Contributing Factor
There's some evidence that South African investment firms have started selling their foreign investments when the rand weakens.
“This trend was very noticeable in 2020, and there were signs of it in 2016 and 2024. This means that, increasingly, when the rand gets weaker, local investors are more likely to sell off their assets held in other countries,” said Philander.
This could be happening for a few reasons.
One possibility is that investors believe the rand will eventually recover, so they see rand weakness as a good time to sell foreign assets. Another is that regulations limit how much foreign investment these firms can hold, and a weaker rand pushes them over those limits, forcing them to sell.
“Or, it could simply be that when the rand weakens, it's a sign of general financial stress, and these firms are selling off assets to get cash or adjust their investments,” Philander added.
It's important to understand what this low volatility means.
“It doesn't mean the rand is risk-free. The rand remains more volatile than many other currencies. What it does mean is that the types of risks and how they're managed need to be looked at differently.’
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