Do commodities still influence the rand?

Opinion piece by TreasuryONE Dealing

In the recent past, we have seen the rand strengthen quite dramatically against most currencies. While we accept the explanations of terms of trade and yield-seeking behaviour, the rand has been classified as a commodity currency in the past. We have seen the rand being buffeted about in the past decade by local and international events, yet we still want to know whether commodities still play a significant role in the rand.

Making a simple comparison with the four main commodities (Platinum, Palladium, Gold and Brent Crude) and the rand over the past 10 year draws up an interesting graph. The question of whether commodities influence the rand is a resounding yes with the correlation between the changes in the Commodity Prices and the change in Rand at 78%.

Rand vs Commodity Change y-o-y

Rand commodities Jun 2021

The correlation between the two variables is clear for everybody to see, but over the past 10 years, one glaring pattern is easy to see. While the troughs are relatively aligned, it is in the peak periods that something really interesting happens. While the rand moves with commodities in these times (higher commodity prices = stronger rand), it never moves to the extremes that commodities move. It seems that commodities overshoot the market far more than the rand, although we give the rand the moniker as the over-and underperformer in the market.

What does the last spike in commodity prices tell us? It is by far the biggest spike in the past decade, and we have seen an equal response by the rand. However, should history repeat itself, it looks more likely that we will run into some resistance for the rand to continue its current surge. Commodities can also be under pressure as we await the response to the Fed and its path forward as we move back into some form of normalised economic activity.

This opinion piece was researched and written by the TreasuryONE Dealing Team. You are welcome to phone or email us and discuss your view on the topic.