Why has the South African Rand fallen so sharply in 2013?

• Why has the South African Rand fallen so sharply in 2013?

Why has the South African Rand fallen so sharply in 2013?

Today we see the South African Rand (Currency:ZAR) is feeling the heat once more:

The latest figures from the spot markets show the pound to South African Rand exchange rate 0.08 pct higher today at 15.7010.
The US dollar to South African Rand is 0.7 pct higher at 10.0526.

Note that the above are spot market quotes; your bank will add their own spread to these wholesale market numbers. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please find out more here.

A bad 2013

The South African Rand has fallen 14 pct versus the British pound since the start of 2013 and has recorded losses of 18 pct versus the US dollar.

The question is why? With many blaming internal politics for the decline of the South African currency they should step back an recognise that the Rand is not alone in suffering hefty losses.

The Australian dollar has also lost significant ground; albeit to a lesser extend, with GBP-AUD gaining 5.3 pct since the start of the year and AUD-USD declining 8 pct.

The answer behind South African Rand declines can be found in global money flows

The US Federal Reserve has flooded the global money markets with cash, and now investors are worried that this flood is coming to an end.

The recent Chinse economic under-performance hasn't helped either; the demand for South African and Australian mining output is a key driver of Rand strength.

Emerging Markets, South Africa included, are thus seeing their currencies absorb the impact of capital outflows.

"The last two weeks have already seen Brazil, Indonesia and Poland intervene to defend their currencies, fearing a disorderly sell-off. This raises questions around the adequacy of FX reserves in some countries, and their ability to cope with a potential reversal in the large weight of capital inflows accumulated in the global liquidity drench," says David Petitcolin at RBS.

According to Petitcolin, "while the recent sell-off may only prove a short-term correction, the extent of 'hot money' which has poured into many markets presents a significant medium-term vulnerability."

The RBS analyst points out that for some countries the amount of hot money which has poured in since 2009 far outweighs the potentially dangerous capital outflows above.

"This means even a small outflow relative to the weight of post-crisis inflows could strain reserve adequacy ratios. MXN, TRY, PLN, ZAR, CLP and CZK look particularly vulnerable," says Petitcolin.

South Africa is said to be particularly vulnerable to these global dynamics, Petitcolin says:

"Countries where cumulative portfolio inflows post-crisis dwarf our dangerous outflows estimates (MXN, TRY, PLN, ZAR, CLP and CZK) are particularly vulnerable in this regard. For instance, South Africa has seen USD46bn of portfolio inflows since Q2 2009 yet we estimate only USD9bn of capital outflows would see the country reach dangerous levels on import and short-term debt reserve cover ratios.

"Out of the main EM recipients of portfolio capital post-crisis, Mexico has run the most relaxed FX reserve policy. It would take less than half the USD175bn accumulated (predominantly in debt securities) to be unwound to push FX reserves below safe levels.
"While this is less of a concern for G4 currencies with global reserve status, other G10 currencies such as AUD, SEK, NZD and CAD may be more at risk given the extent of foreign positioning in their financial markets. Without a reserve backstop any change in sentiment would be absorbed by the exchange rate."