The South African rand’s performance is usually judged on how it performs against the US dollar. But why is one market so erratic, and the other seen as a benchmark for high performance?
Whenever there’s a major event in Mzansi, all eyes turn to this metric: More often than not, economic experts are left hoping that the rand will merely “hold firm” rather than make any improvements. Our currency only really makes gains thanks to factors outside of the political sphere.
We’ve done our homework and looked into the biggest influences that dictate the dollar to rand exchange rate. You’ll probably be familiar with some, but we’ve got a few curveballs lined up too.
If South African exports are popular and in high demand, that will see the rand value strengthen. A strong trade industry is indicative of a well-performing currency. But if there’s an abundance of supply and less demand, that can have a catastrophic effect on the rand.
This works a lot like supply and demand: A currency’s worth can be determined by how many people are dealing in it. If people and businesses overseas increase their demand for rand, that can boost our currency. Adversely, having a surplus of available currency cheapens its value, and impacts the exchange rate.
The inflation rate is the rate at which the general price of goods and services are increasing: This factor is very much the “Goldilocks” of the list, where everything needs to be just right. Too little in the way of inflation suggests a stagnant local economy, whereas too much can destabilise the market.
The interest rate is the price at which money can be borrowed: A low-interest rate encourages more people to borrow money, so they can pay back more into the system.
However, this also needs to be strictly regulated – pumping money back into the country may not have the desired effect if business confidence and trade does not grow accordingly.
Whoever your best trading partners are, you need their economy to perform well. Otherwise, you all go down together. We saw South Africa suffer when the Turkish Lira crashed earlier in 2018. The key is to choose your trading partners – and their goods allocations – wisely.
Perhaps the biggest no-brainer on this list. If you’ve got a chaotic government making terrible choices and constantly getting things wrong, it looks very bad for the currency. Failure to effectively run the country will spook businesses, trading partners and even tourists from investing.
We’ve already touched on the recent recession, but there are two key economical factors which regulate the exchange rate. Surprise negative economic news (as we received in September) upsets the balance of dollar to rand great. With Donald Trump at the helm, America has also experienced its own ups and downs.
Meanwhile, stability is key. The longer a currency can maintain a respectable performance, the more strength it will gain. Any improvements need to be seen as long-term.