Traders bless rand down in Africa
The currency's trade volume and volatility is keeping currency analysts on their toes.
The rand has been so weak in recent days, you could be forgiven for thinking that there are only sellers in the market, but a morning spent at the biggest currency trading desk on the continent makes it clear that this is far from the case.
Standing amid rows of desks and computer screens on the currency trading floor, sales staff and traders beaver over computers, buying and selling the currency, yelling the occasional question about availability, while traders field direct queries on the internet from clients.
It is a 24-hour operation, where deals go on night and day in different time zones.
It is a world where jittery global financial markets change on a whim, and every event is a potential game changer.
To miss the smallest news that could influence rating agencies Fitch, Standard & Poor's or Moody's, or to note a spike or a drop in a commodity price, could be a costly mistake.
Richard de Roos, the head of foreign exchange at Standard Bank, said: "You have to be prepared. You walk in in the morning, and then a plane crashes into the twin towers in the United States or you have the collapse of Lehman Brothers [the largest bankruptcy filing in history], and everything changes in an instant."
System to mitigate risk
When Reserve Bank governor Gill Marcus announced a 50 basis point hike in interest rates in January, the rand went from R11.12 "three seconds later to R11.03, before moving to R11.30", he said, as the markets digested the information.
Which is why the system, in this case belonging to Standard Bank, has built-in mechanisms to mitigate risk on top of constant information monitoring.
It may be cold comfort to struggling consumers with less disposable income and increased petrol and electricity prices, or companies struggling against the fallout of a weaker rand, but the rand now accounts for 1.1% ($60-billion) of world trade, moving from 20th place in 2010 to 18th in the latest Bank for International Settlement (BIS) survey.
According to Stanlib chief economist Kevin Lings, the value of the rand traded globally has risen 108% in the past three years.
Daily South African global foreign exchange market turnover amounts to about 15% of gross domestic product (GDP) and, according to the Reserve Bank, more than $21-billion of the trade in the rand takes place in South Africa, which means that $40-billion (about 55%) of the daily trade in rand takes place offshore.
In the BIS survey, South Africa is rated ahead of Brazil (19th) and India (20th), whereas for Mexico, rated 8th for foreign exchange trades, the turnover is 11.4% relative to its GDP.
Rand always at risk of volatility
Investec said in a statement: "The rand is always at risk of volatility, given that South Africa is a small, open economy and the daily turnover of the rand is close to $25-billion."
Investec expects at least one more interest rate hike before the end of 2014.
The reality is that South Africa has always been a popular destination for speculators, led by relatively high interest rates.
This has led to sharp intraday movements. But De Roos believes that the rand has stabilised since January.
Higher interest rates attract inflows from investors and speculators seeking higher yields, plus South Africa is viewed by many as a liquid market, where investors can still find buyers and also almost no foreign exchange controls that apply to foreigners.
Investors benefit from the carry trade, the difference between the interest rate in rands and the interest rate in dollars.
A cyclical performance
So, money can be borrowed in dollars and invested in rands, and the difference in the interest rate benefits the investor.
De Roos and economist Bruce Donald, a rand strategist at Standard Bank, believe, like many analysts, that the rand's performance is cyclical.
A move away from emerging markets as developed markets begin to show growth, high deficits, slow growth and labour-market unrest are discouraging investors at the moment.
Said Donald: "All of the fragile five have twin deficits, with South Africa having a current account deficit and a budget deficit, so we can see a correlation in how the currency performs and how big the current account deficit is."
Donald said the Reserve Bank had opted not to support the currency, despite its volatility, but to allow it to act as a shock absorber for the economy.
He warned that, just because the currency was cheap by trading standards, there was "nothing stopping it getting cheaper".
De Roos is positive about the rand, which he believes will come into its own in the future.
He is also seeing increased involvement in the markets by individuals and small, medium and macro enterprises, and the bank is looking at better ways to cater for these clients.
John Cairns, currency strategist at Rand Merchant Bank, believes other emerging markets are also liquid, which could result in them catching up with South Africa in terms of being a market for currency trading.
"But why do we need to be the most liquid currency?
"The sophistication of the South African market is still a factor that attracts investment."
Wayne McCurrie, head of Momentum Wealth, said the rand was too expensive previously, and should be closer to R10/dollar.
"The reason it weakened is that it was sitting at R7 two years ago. On bad news, expensive stock loses value, but cheap stock tends to stay where it is."
Investec's Annabel Bishop, however, believes that, when looking at rand purchasing parity power, fair value is R8.30 to the dollar.