How a wild rand has become a proxy for emerging markets

JOHANNESBURG — South Africans have become all too accustomed to a volatile local currency which schizophrenically can make large swings in a single week. It’s nowhere near as volatile as cryptocurrencies such as Bitcoin. But in terms of real-world currencies, the rand can sometimes feel like it’s the closest you’ll get to a relatively unstable store of value. Nevertheless, so far in November, the rand is having a good month, thanks in part to an interest rate hike of 25 basis points. But as these experts point out in this article below, the highly traded rand has also become a key signifier of general global sentiment towards emerging markets. Hopefully, the recent strengthening signifies a rising tide that will lift all EM boats… – Gareth van Zyl

By Antony Sguazzin and Rene Vollgraaff

(Bloomberg) – The rand’s wild swings whenever there is good or bad news elsewhere in the developing world is due to its status as a proxy for emerging markets, rather than to domestic factors, said Francois Groepe, a deputy governor at the South African Reserve Bank.

The South African currency is about the 16th most-heavily traded currency globally, while the economy ranks at about 32nd or 33rd, Groepe told editors at a lunch in Johannesburg yesterday. Spot turnover in the rand is equivalent to about $4bn daily, while total turnover is as high as $17bn, he said.

An employee holds South African Rand notes in this arranged photograph. Photographer: Jason Alden/Bloomberg

“There is little doubt that the rand is a proxy because why would you have such a difference in the turnover of the currency relative to the size of the economy?” he said. “Often the currency moves in tandem with what’s happening to other EMs.”

The volatility of the rand, due in part to the liquidity of South Africa’s comparatively deep financial markets, makes forward planning difficult for businesses who pay their costs or derive their revenue in foreign currency. It also bedevils policy making as it is a significant inflation risk, according to the central bank.

The currency’s one-month realised volatility versus the dollar climbed as high as 26% during Turkey’s currency crisis in September, third only to that country’s lira and the Argentinian peso, according to data compiled by Bloomberg. Price swings have since dropped to 15.8%, still the third-highest among emerging-market peers.

The South African currency is heading for its best performance in November in 30 years, having gained 8.2% against the dollar. Still, it’s 9.4% down so far this year.