The Butterfly Effect: Why the Rand is suddenly very vulnerable

Late American mathematician and meteorologist Edward Lorenz is best remembered as the father of chaos theory, which says there are underlying patterns within even the most random events. But he also left us the concept of the butterfly effect, which says even small events can have massive repercussions on the other side of the world.

Lorenz told us: “A butterfly flaps its wings in the Amazonian jungle, and subsequently a storm ravages half of Europe.” With 170 people having succumbed, the Chinese-initiated coronavirus is no small event, and it is sure to have a wider impact. Bear this in mind as we batten down for another assault on the Rand.

In the wake of the uncertainty, Wall Street’s spreadsheet jockeys are re-working relative economic numbers, swinging the risk ratio against trade-dependent Emerging Market currencies. With around half of SA’s economic activity dependent on trade flows, our high-beta (ie volatile) highly liquid currency is back in the spotlight.

The Rand is being widely tipped as the EM currency that will lead the others lower. So should these forecasts be fulfilled, when we witness a tanking Rand best to remember the butterfly effect. And that when Mr Market gets the bit between his teeth, any excuse will do.

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