ZAR/USD Profile
Introduction
The South African Rand (ZAR) is the official currency of the Republic of South Africa. Until the late 1960’s
South Africa had a fixed exchange rate, later on the Rand was pegged to major foreign currencies. The
government switched to a system that formally expressed parity against the United States Dollar (US$)
in 1979. The foreign debt crisis of 1985 took the Rand to an all time low of less than US$ 0.43. During the
mid eighties dual exchange rate system or the Financial Rand was introduced to provide protection to
the domestic economy from adverse effects of large capital outflows. The Financial Rand was created by
the sale of non-resident assets in the country and was available only to foreigners for investment in South
Africa. During time of economic isolation, the Financial Rand served South Africa well, however it had many
disadvantages. The Financial Rand invariably stood at a discount to commercial Rand and during 1992 this
discount was almost 40% while, in 1993 the discount declined to 20%. In fact, the size of the discount also
played a major role in determining South Africa’s relative attraction as an investment destination. Due to its
limitations, the government decided to terminate the Financial Rand and dual exchange rate system was
scrapped in 1995.
Over the past one year, the Rand exchange rate has been volatile with the 5-day volatility rate increasing
from an average of 9.6% in March 2010 to 14.7% in March 2011 (Bloomberg). According to the latest triennial
of the Bank of International Settlement (BIS) survey, the daily average turnover for the Rand stood at about
US $ 24 billion making USD/ZAR the fifth most active emerging market currency. This could probably be
one of the reasons for the Rand remaining volatile and sensitive to shifts in investor risk appetite. As in any
emerging economy, South Africa had also witnessed a strong surge of portfolio inflows into the country.
The rise in price of Gold and Platinum has also supporting the terms of trade, because the price of exported
commodities still outpace the price of imported commodities.
The interrelation between the prices of Gold and Platinum with the South African Rand is very visible. In
fact, the currency of Africa’s biggest economy depreciated as much as 2.8% to 7.0311 per dollar on 15th
of March 2011, the biggest intraday decline since May 19, 2010. The terms of trade tend to influence the
exchange rate over the medium to long term. It is important to note that gold fell as much as 3.5%, while
platinum declined as much as 3.2% on 15th March 2011. South Africa was the world’s biggest producer of
gold in 2007 but was surpassed by China in 2010. Rand’s movements against the US$ are often influenced
by the direction of gold and platinum prices. In turn, South African miner profits hinge on the metal price
and the US$/ZAR exchange rate. According to a recent comment by the World Bank’s Africa economist,
Shanti Devarajan: Rising private capital flows and commodity prices are fuelling gains in the Rand, these
flows are “volatile” and “difficult to manage”.
Recently, Japan was hit by a severe earthquake followed by a tsunami on March 11, 2011. This natural
disaster had a effect on South Africa’s currency with the Rand slumping to a 10 month low after Japan’s
crisis sparked a sell-off caused by a drop in the demand for gold and platinum, which makes up about fifth
of South African export earnings.
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