The South African Rand
ZAR
Recent Currency History
• 1961 Introduction
– Traded below 1ZAR/USD
until 1982
– Political pressure and
Apartheid
– Reached over 13 in 2001
– Investigation brought it
back around 6
• Common currency
–
–
–
–
South Africa
Namibia
Swaziland
Lesotho
Technical Analysis
• The Rand is quoted in European terms so the charts are
inverted.
• Exchange rate as of 4/27 6.1568 ZAR/USD
• One week forecast 6.25 ZAR/USD
• Even based on this forecast of 6.25 U.S. companies
should hedge with one week forward
– Only the hedge fund managers and traders should hold an open
position
One Year
• 90 day average
– Consistency bouncing between Bollinger bands
– Carried momentum once crossing the moving average
Three Month
• Moving average
seems to be an
excellent predictor.
– ZAR recently
approached upper
Bollinger Band
– Rand also recently
depreciated across the
30 day moving
average
30 Days
• The Rand crossed the
moving average over the
25th and 26th
• We forecast it continues
this depreciation over the
next 7 days
• It should approach the
low Bollinger band
• Reaching projection of
6.25 ZAR/USD in the next
7 Days
Implications
• U.S. Company with a 7 day receivable in South African
Rand (selling into S.A.)
– For Transaction exposure lock in a forward
• U.S. Company with a 7 day payable in ZAR (buying from
S.A.)
– Hold the position open-short in Rand
• Hedge Fund Manager or Currency Speculator
– Sell Rand short for 7 days
– Hold dollars long compared to Rand for 7 days
• Both U.S. based companies should hedge with forward
contracts
– Currency speculation is not their core business and holdong any
open position might lose money
Short Term 3 months into the Future:
• Interest Rates South Africa/United States
US Bonds 3 Month 4.61 4.62 4.57 4.52
(Yahoo Finance)
Treasury bills-91 day (tender rates)
6.64 6.64 6.64 6.7
http://www.reservebank.co.za/
• South Africa has relatively higher short term interest rates than the
United States.
• They should experience increased short term capital inflows, thus
demand for their currency increases.
• Inflows of short term capital, resulting in demand increases, will
strengthen the currency’s spot rate.
Balance of Payments
Imports in Rand Millions -8999
Exports in Rand Millions 7433
Balance of Payments Balance deficit: -1566
South Africa has a high trade and current account deficit and the
country will need a lot of foreign capital to finance these deficits.
• This will put downward pressure on the exchange rate of the Rand.
CPI Findings
• The 2005 CPI score relates to perceptions of the degree of
corruption as seen by business peiople and country analysts
and ranges between 10 (highly clean) and 0 (highly corrupt)
• TI 2005 Corruption Perceptions Index
• 2005 CPI score 4.5
• Confidence range 4.2 - 4.8
http://www.transparency.org/policy_research/surveys_indices/cpi/2005
• This score is neither highly corrupt nor highly clean so government
intervention should not play a huge role in affecting the Rand.
3 month Analyses and
Recommendation
• Based on Interest Rate Parity a currency trader would
want to have an open long position in Rand because the
currency is strengthening. If they hold a short they want
to cover their short position.
• Based on Balance of Payments a currency trader would
want to have an open short position in Rand. Due to this
method predicting a weakening of the rand over the next
three months
South African Rand
“The achievement and maintenance of price
stability” SARB
Forecasting the Rand using the
Relative PPP
• South African Inflation rate- %3.9
– http://www.reservebank.co.za
• United States Inflation rate-%3.36
– www.inflationdata.com
Current Spot Rate- 6.0538
-YahooFinance
South Africa’s Inflation Rate
• The SARB has set an inflation target between 3-6%
• They have remained in the target spread for the past 25
consecutive months.
• Their Central Bank-SARB credits the robust domestic
Demand and healthy economy for the stable inflation
rates.
Inflationary Concerns
• For both the U.S. and South African rising
international oil prices put upward pressure on
inflation.
• Big Ben said “Among the factors restraining core
inflation are ongoing gains in productivity, which
have helped to hold unit labor costs in check,
and strong domestic and international
competition in product markets, which have
restrained the ability of firms to pass cost
increases on to consumers. “
Forecasting 5 Years into the future
• European Terms
– PPP Spot Rate = Current Spot Rate x (1 + infhome)n/(1 +
infforeign)n)
PPP Spot Rate=6.0538 X (1+.039)^5/(1+.0336)^5
=6.0538 X 1.2108/1.1796
=6.0538 X 1.02645
= 6.21 Rand to the U.S. Dollar
Impacts on a U.S Global Firm with
operations in South Africa
• It appears the Rand is going to weaken against
the Dollar
– Transaction Exposure-Acct. Receivable will be less
valuable in the future unless an exchange rate is
locked in.
– Economic Exposure- Assets and Operating Income
from South Africa will be less valuable in terms of the
USD
– Translation Exposure- Translation losses would occur
from the depreciation of the Rand.
Implications of the PPP exchange
rate on Global companies
• Since the inflation rates of the two countries are fairly
close the parity does not suggest a large movement in
the spot rate, therefore it is not a major dilemma for any
global company.
• It appears to be a unfortunate time for U.S. companies to
enter into the South African market since their assets will
become less valuable.
• Current companies should hedge their risk by globally
diversifying their operations.
• A firm manufacturing in South Africa would experience
profit gains from the cheaper variable costs in home
currency terms.
International Fisher Effect
10 Year Bond
U.S. = 4.985
South Africa = 7.370
South Africa current spot rate = 6.0538
Future Spot Rate = Current Spot Rate * (1 + int. home) ^n/ (1 + int. foreign) ^n)
= 6.0538 *(1 + .0737) ^ 5/ (1 + .04985) ^ 5
= 6.0538 *(1.42697) / (1.27537)
= 6.0538 *(1.11887)
= 6.77340
International Fisher Effect cont…
• This suggests:
– The rand will weaken against the U.S. dollar.
– Inflation and interest rates with increase.
• A company selling or manufacturing
products
– Exporter-good
– Importer-not so hot
The End