The state of the rand
Firstly, based on the long-term average real trade-weighted exchange value and, secondly, based on its relative strength against the other resource-based currencies.
We maintain our view that the global environment is likely to drive the Rand in the long-term. Specifically, the resource cycle remains key. This implies an expected close correlation with the other resource-based currencies.
Our recent concern focused on the fact that since early May, the Rand was sharply outperforming the “pack” of resource-based currencies. Although the Rand has previously deviated from the “pack”, albeit temporarily, we felt there was no long-term rationale for this.
Consequently, Investment Solutions believed the implication was that either the other resource currencies are set to appreciate relative to the US Dollar, or some weakness can be expected in the Rand’s nominal value to bring it back into line.
Last week’s 0.5% interest rate cut caught the market by surprise and triggered a reassessment of the Rand’s value.
What does this imply for the Rand? The recent weakness in the Rand is indicative of the currency trending back into line with the other resource-based currencies, following a period of (unsustainable) outperformance.
The interest rate cut was, in all likelihood, the triggering mechanism that led to market participants reassessing the Rand’s value.
Although August has witnessed general appreciation for the global resource currencies, relative to the US Dollar, the Rand has weakened. Indeed, the New Zealand dollar is now the best performing of our sample set.
Comparing the Rand/US$’s performance to that of the Australian dollar/US$, the former is currently enjoying a 5% year-to-date out-performance.
This compares to a 15% out-performance around a month ago.
The implication is that the Rand is now “behaving normally” and coming back into line with the other key global resource currencies.
Indeed, based on this measurement, as well as the Rand continuing to trade above its long-term real trade-weighted value, some further under-performance is likely.
