It’s a question 8 out of 10 people will be able to answer within a reasonable range. Why is that?
Some folks might know someone who recently travelled and complained about how expensive things were “overseas”. Others might remember it from the 10 second financial news snippet at the end of the half-hourly radio news, or some might even know about it because there was only so much to talk about around the braai over the weekend. Point is, it is a piece of information South Africans carry with them wherever they are. It is also something that has featured in the news lately, and not for the best of reasons.
As financial advisers, we have to take cognisance of the Rand and the probability of it strengthening or weakening. When exposed to offshore assets in your portfolio, the Rand can play a serious part as either a detractor or extender of returns. When living, breathing and most importantly buying in South African Rands, you should always calculate the Rand value of your offshore assets to have an idea of total return.
“Where will the Rand go next?”
I’ll give more than One Rand to the man that can accurately answer that.
What we can do however, is look at past data to get a sense of what the experience has been. In the chart below, we had a look at the Rand/US Dollar Exchange rate from 30 September 1996 to 30 September 2014. We analysed the rolling returns over 12 months, 3 months and 1 month time periods. We wanted to see what the worst weakening, the best strengthening as well as the average strengthening and weakening of the Rand was against the Dollar.
What is evident from past data is the severe magnitude of violent weakening that the Rand displays over all time periods. It is interesting to note that the strengthening surprises are nowhere near as powerful as those seen on the downside.
The one thing that does get stressed very often about the Rand is that it is a volatile currency. This statement should not be taken lightly, as this next graph shows. Over the same time period (which includes 6205 daily observations) we looked at the amount of times that the rolling 12 month returns fell between the average strengthening (13.5%) and average weakening (-16.7%) figures.
If we were to say that history is an accurate representation of the future of the Rand, then we would only expect an annual change in the Rand vs the Dollar (from -16.7% to 13.5%), 55% of the time. 32% chance that the outcome would be worse than expected, while the Rand might sneak in a surprise upside move above the expected change 13% of the time.
Any guesses where the Rand will go next? No one?
