May was a poor month for the rand. It lost about 10% of its US dollar value by month end. But perhaps of more importance, it also lost about 6% of its value against an average of nine other emerging market currencies (Turkey, Russia, Hungary, Brazil, Mexico, Chile, Philippines, Malaysia, India).
Clearly there were specifically South African as well as global forces driving the rand weaker. Uncertainty about the direction of fiscal policy in SA and the role of President Jacob Zuma in introducing such uncertainty has not dissipated and, moreover, seems to have re-entered the markets in an attenuated form during May. Global forces, well represented by other emerging market currencies, are a consistent influence on the exchange value of the rand. But SA specific risks can also influence the rand – that can be identified when the rand behaves to a degree independently as it did again in May. The Zuma effect on the rand is easily identified by its behaviour of after 9 December 2015 when the President replaced the Minister of Finance, Nhlanhla Nene. As may be seen, the rand not only weakened but weakened relatively to other emerging market (EM) currencies, as identified by the ratio of the USD/ZAR to the average US dollar value of the other EM currencies. As may be seen in figure 2 below, this ratio, with higher numbers indicating rand weakness, increased in December 2015 and has remained elevated at these higher ratios since then. The rand did enjoy some absolute strength from late January 2016 and some relative strength in April 2016, which was reversed in May. Figure 3, which shows the developments in the currency market in 2016, makes this very clear.
When we run a regression model explaining the value of the rand using the EM average exchange rate and the EM default risk premium as explanations, we get the results shown below – using daily data from January 2013. As may be seen in figure 4, the Zuma intervention added about two rands to the cost of a US dollar. It may be seen that while the rand has strengthened since, this extra rand weakness has remained of the order of between one and two rands per dollar. The predicted value for the USD/ZAR on 31 May was R14.20 compared to its market value of about R15.70.
