How Currency Markets Work and Why the South African Rand is Falling

by | Aug 31, 2018

Given that South Africa operates within a flexible exchange rate regime, the value of the Rand, like any commodity, is determined by the market forces of supply and demand. The demand for a currency relative to the supply will determine its value in relation to another currency.

In theory, the demand for a floating currency (Rand) and hence its value changes continually based on a multitude of factors. In the case of the Rand, it’s current weakness can be attributed to a myriad (both internal and external) structural problems facing the economy.

The main determinants of a currency’s value include demand for a country’s goods and services. This is closely linked to the growth and national income of its main trading partners.

Unfortunately, South Africa is quickly becoming a nation that imports more goods than we export. With the high cost of labour, and strong defiant labour unions who now hold companies and the country to ransom, this situation is unlikely to ever change and, in all likelihood, will get worse. A complete change in mind set is needed by the trade unions to work together with business and the government to create an environment that is conducive to productivity which will ultimately lead to growth and the much-needed employment. Sadly, this does not seem to be the case…

Another important aspect is domestic interest rates. High rates attract foreign capital, causing the exchange rate to strengthen, but high inflation wipes out the benefit of high interest rates to foreign investors.

Additional factors that drive the currency down are:
• Current account deficit – the deficit increases when a country spends more on foreign trade than it is earning and must borrow capital from foreign sources to make up the difference
• Political instability – poor economic performance and political instability reduces investor confidence. This inevitability forces foreign investors to seek out stable countries with strong economic performance.

Unfortunately, all of the above is negatively impacting our Rand. As you are aware in our June newsletter the article “Ramaphoria versus Ramareality” we spoke about the Rand and why it is important to diversify one’s Portfolio by including offshore assets in one’s total portfolio. We have now most recently seen the spectacular collapse of the Turkish Lira, which unfortunately has dragged down most emerging currencies, ours included.

Through events such as these, it unfortunately puts into perspective the reality of where South Africa stands on the world economic stage and how we are influenced by events not just internally but even more so internationally.

Below is a timeline of the biggest Rand depreciation events over the past 11 years:


  • 47% Global financial crisis
    From 29 September 2008 (R8.05) to 22 October 2008 (R11.87) The housing boom in the US gave rise to a subprime lending crisis: people who couldn’t afford it, were given large mortgages. These dud mortgages were then sold off to banks through intricate financial instruments, which triggered a massive confidence crisis in the financial sector, eventually pushing it to the brink of collapse. Investors sold off risky assets – particularly in emerging markets – and fled to the safety of the US dollar, which saw massive gains during this time.
  • 21.9% Eurozone crisis
    From 1 September 2011 (R6.97) to 22 September 2011 (R8.49) The crisis in the eurozone during this time caused turmoil all around the world. As ratings agencies downgraded Italy, and investors worried about the stability of the eurozone, there was a massive influx into safe haven currencies like the US dollar and Swiss franc. Investments in emerging markets all but dried up.
  • 16.4% Taper tantrum
    From 6 May 2013 (R8.91) to 11 June 2013 (R10.37)
    This sharp fall was due to the infamous ‘taper tantrum’: a global sell-off triggered by the surprise announcement by then Fed chair Ben Bernanke that the US central bank is considering scaling down quantitative easing, the massive amounts of money it pumped into global markets. Over the course of 2013, the rand lost almost a quarter of its value.
  • 16.0% Turkey turmoil
    From 9 August 2018 (R13.41) to 13 August 2018 (R15.55)
    The latest rand shock originated in Turkey, where the economic fallout from a diplomatic spat with the US soon snowballed into grave concerns about the Turkish debt situation. Foreign-denominated loans now represent half of its GDP, and its president’s meddling in monetary policy aggravated investor concerns.
  • 14.9% Eurozone crisis
    From 28 July 2011 (R6.62) to 9 August 2011 (R7.61)
    While the EU had approved a bail-out package for Greece by this stage, the eurozone crisis was still in full swing. During this time, US bond yields spiked to above 3% and investors ditched emerging market assets, including the rand.
  • 14.7% Chinese meltdown
    From 6 January 2016 (R15.62) to 11 January 2016 (R17.92) The rand’s steep fall was triggered by a shock slump in the Chinese market. Chinese authorities repeatedly had to halt trading after sharp declines in share prices. This instability triggered large losses on global markets and – as China is the world’s biggest consumer of commodities – compounded the slump in metal prices. As a large platinum and gold producer, South Africa was hit hard.
  • 13.3% Pravin Gordhan fired
    From 27 March 2017 (R12.31) to 11 April 2017 (R13.96)
    Pravin Gordhan was fired as finance minister on March 30th, which caused havoc in the local market and was followed by credit rating downgrades.
  • 13.2% Grexit fears
    From 3 May 2012 (R7.69) to 1 June 2012 (R8.71)
    The rand fell victim to more uncertainty about the eurozone in the run-up to elections in Greece, with investors fearing that an anti-austerity group of parties could force a “Grexit”.
  • 12.5% Fallout of global financial crisis
    From 9 February 2009 (R9.53) to 5 March 2009 (R10.73)
    This was a grim period during the global financial crisis, with massive losses among banks, which continued to receive emergency capital from governments. The MSCI World Index lost more than 9% during this time. In a single quarter, Japan’s economy shrank by 12% and Germany saw a 2% decline in its GDP.
  • 11.2% Gordhan arrest rumours
    From 19 August 2016 (R13.17) to 31 August 2016 (R14.65) The rand took a hit amid rumours that the then Finance Minister Pravin Gordhan was on the verge of being arrested. This followed a report that Gordhan was summoned by the Hawks to answer charges relating to a so-called rogue unit in the SA Revenue Service.
  • 10.7% Nenegate
    From 9 December 2015 (R14.51) to 11 December 2015 (R16.05) On 9 December 2015, then president Jacob Zuma replaced respected finance minister Nhlanhla Nene with ANC MP David van Rooyen. A sharp sell-off followed, which was halted by the appointment of Pravin Gordhan.

Over the years we have documented many articles on the Rand and why it is important for investors to ensure that they have adequate offshore exposure to protect their wealth globally. We Saffers need to face up to the hard-cold facts that we are an emerging market and as such will face volatility and the long-term prospect of a slowly (sometimes quick) depreciation of the Rand. There is no crystal ball when it comes to investing but what we do know is that diversification is the one key ingredient to a successful financial future, and a very important part that makes up diversification is OFFSHORE ASSETS…