RMB Global Markets Research
Currency focus
13 January 2016
SA negatives only account for a part of the
rand’s decline
Contents
We estimate that SA-specific factors account for approximately 41% – or R3.45 – of
the rand weakness against the US dollar since 2011. The remaining weakness comes
almost equally from dollar gains and “risk and commodity price” effects. These effects
are summarised in Figure 1. Rand weakness is illustrated in Figure 2.
3. SA-specific factors
1. Extracting SA negatives
2. Weakness over time
Decomposing the weakness in this manner helps us ask the right questions in thinking
through the rand outlook. Will the dollar keep gaining? Is the commodity bear cycle
over? Will SA specifics keep worsening? Moreover, it highlights how important global
factors are in the rand outlook, having accounted for 59% of the weakness in this
cycle. By implication, we should be careful in forecasting that the rand will weaken just
because local issues are negative.
Figure 1: Components of rand weakness since July 2011 (as share of total)
%
50
40
30
20
10
0
Dollar gains
Risk and
commodity effects
SA specifics
Source: Reuters, I-Net Bridge, RMB Global Markets
Data as at January 2016
Figure 2: USD/ZAR
20
16
Analyst
12
John Cairns
Currency strategist
8
4
Rand started
weakneing in July
2011
0
2000 2002 2004 2006 2008 2010 2012 2014 2016
[email protected]
+27 11 282 8656
Source: Reuters
Data as at January 2016
RMB Global Markets Research
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Weakness over time
Figure 3 shows the components of rand weakness since
USD/ZAR reached its lowest point in July 2011.
Figure 4: The Dollar Index
135
Figure 3: Components of rand weakness since July 2011 (aggregate over
time)
120
125%
The dollar
gained 30% in
2014/15
SA specifics
105
Risk and commodity effects
100%
Dollar gains
90
75%
75
50%
60
1990
25%
0%
2011
1995
2000
2005
2010
2015
Source: Reuters
Data as at January 2016
Figure 5: Rand and other risk and commodity currency movements
2012
2013
2014
2015
2016
Index (Jan-08 = 100)
250
Source: Reuters, I-Net Bridge, RMB Global Markets
Data as at January 2016
210
The dollar effect is simply derived from the Dollar Index. As can
be seen in Figure 4, the dollar gained around 30% over the
period, with most of the strength coming in 2014 and early
2015.
Rand
Risk and commodity
currencies
170
130
The “risk and commodity price” effect is derived from the
performance of the currencies of Australia, New Zealand,
Turkey, Hungary, Brazil and Mexico. These currencies trade with
very high correlations with each other and with the rand. This is
illustrated in Figure 5. The fact that all these currencies,
including the rand, have all weakened together shows there is a
common global driver — i.e. the commodity cycle and risk
appetite for high-yielding/commodity plays. Adjustments were
made for dollar and inflation effects to avoid double counting.
This “risk and commodity price” effect accounts for around
90
50
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Reuters, RMB Global Markets
Data as at January 2016
Note: “Risk and commodity currencies” are defined in the chart.
30% of the rand’s weakness since 2011.
South African-specific factors are those that are not accounted
for by the two effects above, i.e. it is the residual rand
movement.
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SA-specific factors
Figure 6 shows the SA specifics time series. We have taken this
further back than 2011 for interest sake.
Figure 7: SA specifics in rand and implied credit rating
A+
Figure 6: SA specifics contained in the rand
SA specifics in rand
(RHS)
A
Index (Jul-11 = 100)
160
70
A-
Rand
weakness
90
BBB+
Nene
140
50
Implied credit rating
BBB
110
BBB120
BB+
Polokwane &
Load-shedding
80
60
2000
130
BB
100
2003
2006
2009
2012
Marikana &
Rating
downgrade
BB150
2006
2009
2012
2015
Source: Reuters, Bloomberg, I-Net Bridge, RMB Global Markets
Data as at January 2016
2015
Mostly global economy
Source: Reuters, I-Net Bridge, RMB Global Markets
Data as at January 2016
When shown like this, the impact of big local political and
economic events of the last decade on the rand is clear. This is
not as obvious as it sounds. When we look at just USD/ZAR in
aggregate, local effects are generally hard to identify as global
effects swamp the local news.
SA specifics, as noted, have added around 41% to USD/ZAR
since July 2011 — that equates to R3.45. This is quite
significant. Note, however, that this has not been a straight line:
one can clearly see that SA specifics were priced as improving in
2014 and most of 2015. SA specifics started weakening before
the finance minister changes began, and have continued since.
Decomposing the rand as we have does not tell us anything
about the future. But it does help us understand what to focus
on. Analysing the data all the way back to 2000 suggests
around 42% of rand moves are driven by local factors, with the
dollar accounting for 31%, and “risk and commodity price”
effects 27% (these figures are in line with the number that we
highlighted above for the period from 2011 to now). Roughly
then, when thinking about the rand, we should spend our time
60/40 between global and local factors.
Figure 4 shows that SA specifics extracted from the rand have
correlated very well with the implied credit rating in SA offshore
credit pricing. If anything, the rand has actually discounted more
negatives than the credit market.
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