The rand has seen some rather interesting moves in the past week. In a conversation with a friend, she asked who has said what to make the rand move. Of course, given the past year or so, one can’t help but wonder what local news are moving the rand because it’s become quite a norm. This time, however, local politics are not to blame. Our answer lies in the US treasury bond yield.
For emerging markets, this is not great news. We’ve seen large currency moves as investors dump EM bonds and rush towards the US. It makes sense, after all – US bonds are considered risk free. And who wouldn’t take a great yield that comes with no risk?
Back to EMs. South Africa is in a much better place that its emerging market peers, and for that we should be very thankful. To give some perspective: Argentina has been hiking interest rates wildly in the past few weeks. About three weeks ago, they had three rate hikes in one week, going from 27.25% to 30.25%, then 33.25% and eventually all the way up to 40%!
Turkey also raised interest rates in an effort to pick up the Lira, and while that offered temporary respite - it's almost as effective as putting a used plaster over a crack in the pavement and hoping it holds until you return with something 'better'. The temporary rise and fall of the currency following the rate hike announcement tells you that that's exactly what the market is doing: waiting. (To find out about the relationship between interest rates, inflation and currencies, click here.)
With those two examples, South Africa is in a much better place, even though the rand is steadily creeping towards R13.00.
So if you’re looking at the rand, wondering what’s going on, look no further than a stronger dollar, higher US yields, and struggling emerging markets.
A look at Emerging Market currencies vs the US dollar in the past month. Graph from Bloomberg.