The Rand vs other Emerging Market Currencies

The Rand vs other Emerging Market Currencies

Opinion piece by  Andre Botha – Senior Dealer at TreasuryONE

In the past couple of weeks, we have all read the headlines about Rand strength and how Emerging Markets (EM) are on the front foot. The reasons for the stronger EM currencies have varied from better terms of trade (i.e. more supply of dollars than demand) to better yields in EM than the rest of the world, where yields are closer to zero.

Just judging by the above statement, it is easy to assume that EM currencies are mostly moving together as they share the same characteristics and therefore need to be aligned. Granted, local factors do have the means of causing a currency to diverge from the basket, but generally speaking, all EM currencies should follow the same trend.

From the graph above, and rebasing the EM currencies from January 2020, we see a definite trend at the start of last year when we headed into the COVID pandemic but slowly, the Rand and the Mexican Peso started to diverge from other EM’s. The Rand is currently trading at a lower level than 18 months ago.

The graph tells us a couple of interesting things. The first is that Brazil, Russia and Turkey all had their own domestic issues. This can easily be seen by definite divergences of these currencies compared to the Rand and Peso. However, in the case of the Real and Ruble, they have continued with the trend after the initial divergence. Thus confirming the statement that EM currencies typically move in the same direction.

The second but more important thing to note is that the Rand, usually either the stand out or whipping boy of the EM basket, has seen a sustained period of strength. It is easy to conclude that the cord of the Rand feels a little overstretched compared to other EM currencies and leaves us with the feeling that the Rand could see a slight reversion to other EM currencies because we think the Rand is a little overstretched. Domestic factors in the form of more intense load shedding could further strain the South African economy. Thus far, the international community has ignored our domestic factors, but for how much longer?