South African Rand Currency Report and Outlook

2008 was a volatile year in the currency markets, and while the news has been dominated by other major currencies, the South African Rand (ZAR) has been as unpredictable as most.

The chart below shows a high of 19.3 and a low of 13.1 against the Pound, a difference of 32% in value from high to low. If you needed to transfer money to South Africa, ZAR 1.5m for a property purchase would have cost you anything between £77,700 and £114,500 depending on your timing.

Even in an unprecedented year of financial change, these are huge movements. What causes the Rand to be so volatile, and what’s the likely picture for 2009?

Since South Africa’s economy depends so much on commodity prices (precious metals, gold etc), its currency fluctuates according to those commodities. So if global platinum and gold prices fall, for example, there is less demand for the Rand and its price drops too.

This is exactly what happened in October as the global financial crisis unravelled. Commodity prices dropped sharply, and so did the Rand, making it cheaper to buy using any other currency, in our example sterling.

The best South African Rand rates were therefore in October, falling back down to the 13 level as commodity prices stabilised later in the year.

South Africa also has high interest rates compared to most of the developed world. Currently they are at 11.5%, making the Rand an attractive option for international investors. As interest rates around the world are generally falling, South African assets are increasingly giving a good return. Unfortunately, that increases demand for the ZAR, and therefore increases the price, giving lower exchange rates.

With currencies as volatile as this, it is very hard to predict the future. Much depends on what happens to interest and commodity prices as discussed above, and they in turn depend on the extent of the global recession and its effects in each economy. Of course, day to day economic data is also important and a specialist currency company like Currency Index will be able to tell you what is coming up that might be important.

Don’t forget, in uncertain times you can fix a Rand rate using a Forward Contract to secure and guarantee an exchange rate up to 2 years in advance. If you are planning on buying property in South Africa, or emigrating there, this could be a good way to remove any uncertainty as to how much your money will be worth when you make the purchase. Again, speak to a foreign currency broker and you will have the best chance of making the right decision.

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