During the course of 2015, the Rand weakened by -25.4% against the US Dollar. Notably, in the first half of 2016, the Rand strengthened 5.7% against the currency.
Over the past six months, the strength of the Rand has wavered. Indeed, it has been extremely volatile and influenced by changes in global investor sentiment.
The pendulum swings in the Rand’s performance have been reflected in other emerging market currencies. Interestingly, the performance of most major emerging market currencies in 2015 and 2016 are closely linked to large swings in foreign currency flows into and out of emerging markets.
Low interest rates in developed markets and the perception that they will stay low for a while has prompted investors – in an attempt to achieve better returns – to invest in emerging markets like SA, where interest rates are higher. These inflows strengthen the Rand.
Whilst the gains in emerging market currencies during 2016 (including the Rand) have been largely welcomed after the sharp sell-off in 2015, we must recognise that these gains do not necessarily reflect an improvement in the economic fundamentals of the country. Indeed, the gains are heavily influenced by changes in global investor sentiment, which remain extremely fickle and subject to influence from a wide variety of factors that are difficult to predict, such as the Brexit vote.
Source: ForexPeople Wealth / Stanlib