South African Rand (ZAR) Volatility

The movement of the Rand is influenced by multiple factors that are constantly changing. In order to accurately forecast/predict the direction of the Rand, the primary driving force behind the Rand needs to be identified. This, in itself, is a challenging task, as economists more often than not have conflicting and differing views and don’t often reach consensus when forecasting the value of the Rand.

In the past few weeks market participants have once again been surprised by the movement of the Rand. This time bythe shear strength of the currency, resulting in it now being branded as overvalued. This recent Rand strength can,amongst other things, be attributed to dollar weakness and euro weakness due to the financial crisis of certain eu member countries, a strong recovery in the price of commodities, an improvement in global risk appetite and the wide interest rate differential between SA and the rest of the world.

A number of economists have pointed out that a strong Rand has contributed to the disappointing and below expected manufacturing and mining data, mainly due to a weaker exports. On the other side, a strong Rand (ZAR) bodes well for imports.

From a the ordinary man on the streets point of view a strong Rand is positive. It drives inflation lower which in turn increases consumer’s real household income.

Extreme volatility in the Rand can translate into  profits or losses over the shorter term and in turn increase therisk in your portfolio. Your portfolio manager should  be able to successfully tap into any offshore investment opportunities for better diversification in your assets, but at the same time reduce the inherent risk in the currency market.

Will we be seeing the ZAR trading closer to R8,00 against the dollar by end of 2010 or will the ZAR strengthen what is your opinion