This is what is hitting the rand right now – keeping South Africans up at night

The volatility of the South African rand increases pressure on household finances in South Africa, but only a fraction of the population actually understands what impacts the rand’s performance.

According to Citadel Glodal’s Bianca Botes, the rand’s volatility against the US dollar and other major currencies keeps many South Africans awake at night.

Despite strengthening over the last few days, the rand is still trading above R18.00/$.

The rand is firstly severely impacted by geopolitical events and global economic trends.

“How well the USD performs and how it impacts the value of the ZAR is greatly impacted by factors such as the US employment figures, inflation rates and gross domestic product (GDP) data, pronouncements by the US Federal Reserve (Fed),” said Botes.

For instance, expectations of a US interest rate cut will boost the rand, as investors will look to other riskier markets (higher interest rates) for improved returns.

“Locally, South Africa’s trade balance, GDP, inflation levels, unemployment figures, and guidance from the South African Reserve Bank about monetary policy.”

“We are also closely watching the impact of the continuous tight monetary policy over the past two years around the world, and the anticipation of central banks moving to a looser stance.”

Moreover, global events seriously impact investors’ risk appetites, commodity prices, trade relationships’ stability, existing exchange rates, and the asset classes investors turn to as safe havens.

Economic indicators that look at economic stability, fiscal health and monetary policy credibility are especially important during volatile periods, such as the one that we are currently experiencing. These factors all influence currency market dynamics.

“One crucial economic indicator that is easily overlooked is trade balance data. The trade balance reflects the difference between a country’s exports and imports of goods and services,” said Botes.

A positive trade balance (surplus) occurs when exports exceed imports, which leads to increased demand for a country’s currency as foreign buyers need the currency to purchase goods and services, and , in turn, strengthening the currency.

A negative trade balance (deficit) occurs when imports exceed exports and puts downward pressure on the country’s currency as more of it is sold to buy goods and services, resulting in currency depreciation.

“Currency trading requires preparation, analysis, and swift decision-making. A key part of the process is interpreting and reacting to economic data releases in real-time,” added Botes.

In the future

In the coming months, Botes said the current heightened levels of geopolitical uncertainty are likely to be sustained.

This will not just be from military conflicts, such as the Russia-Ukraine war and the conflict in Palestine, but also from a trade relations perspective.

She also believes that advancements in technology, including AI, the growing popularity of currencies, and the increased focus on environmental, social, and governance (ESG) factors will all affect currency trading in the medium—to longer-term.

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