Posts Tagged ‘exchange rates’

South African Rand Under Pressure

The rand being fairly strong the last few months is under pressure and has hit a 14-month low against the dollar on Tuesday the 20th September 2011 , with many factors pointing to more losses for the Rand, already the worst performing Currency among emerging market currencies.

The rand has lost close to 5% to the dollar so far this year, but it is still up about 20% since the beginning of 2009. The strong South African Rand has managed to keep inflation low for the last few years, but with the currently weakening of the South African Rand the outlook for inflation increase is looming

Hedging your forex?

If you hedge your foreign exchange you basically protect your self agains future movements of the exchange rates. An importer for example can fix his exchange rate against future increases of the currency he is using while importing goods. A certain fee is payable to fix your exchange rate at a certain level in the future.

The advantages are that the importer can predict the cost of goods he imports and is protected against weakining local currency. The disadvantage is that it might have been cheaper to buy the foreign currency at the going exchange rate at the time.

The opposite is for exporters who sell in a foreign currency.

Basically hedging is an insurance against volatility in the exchange rates, with the risk that the exchange rate does the opposite as you expect so besides being an insurance it can be seen as a gamble as well.

Exchange Rates Fluctuations

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply like in normal markets. It will become less valuable whenever demand is less than available supply.

Growing demand for a currency is due to either an increased  demand for money, or an increased speculative demand for money.

The transaction demand for money is highly correlated to the country’s level of business activity, gross domestic product (GDP), and employment levels. The more people there are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.

The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country’s interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit). Speculative demand is the main reason for some currencies fluctuating exchange rates.

Exchange Rates Market

In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 7  South African Rand (ZAR, R) to the United States dollar (USD, $) means that ZAR 7 is worth the same as one USD . The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day.