China Turmoil Hits the SA Rand
The China slowdown continues to remain a considerable risk for South Africa economy. Any further weakness in the Chinese economy will damage any recovery and deepens the financial damage. South Africa is highly dependent on China investments due to the interlinked economies. As of 2010, China was South Africa’s largest trading partner, having surpassed the USA. Now countries that are dependent on China growth, especially raw materials suppliers like South Africa, will need to accommodate their economies.
Over the past few years China has been the main source of growth in the world, hence current slowdown is heavily impacting trade. South Africa as a major player in the mining industry was hit hard by a weaker China as the demand for commodity like iron ore, copper and coal continued to fall. Current developments in China not only impacts trade between the two countries but also has been the dominant channel of turbulence transmission for foreign exchange rates.
China stock market crash has been the main trigger for further Rand depreciation. As weaker equity market in China coupled with the commodity deflationary pressures will put pressure on resource-heavy currencies such as the South African Rand (see Figure 2). Whenever you spell risk aversion in financial markets, investors will always liquidate risky assets like the South African Rand. Under this circumstance and in face of further Rand devaluation the only alternative and safe haven remains the US Dollar. In time of crisis the US Dollar has always been perceived as the ultimate safe haven currency.
Rand performance relative to other emerging markets currencies (see Figure 3) confirms the deflationary pressure and the dollar status of safe haven. When you’re in a definite and a strong trend you need your currency to weaken/strengthen against all other major currency not just in isolation and that’s the ultimate indicator that you have a trading market. The macro theme behind current weaker Rand trend are not just ephemeral conditions but long lasting forces that are reinforcing the trend.
If you’re looking for an alternative to the South African Rand, US Dollar is a safe bet as all the data point towards stronger US Dollar in the coming years. Current global macro developments make the US Dollar the only option in town.
The contagion effect from China’s slowdown is felt in many other African countries which over the past decade have grown tight economic relationship with China. In this regard their currencies are also under pressure. The slide in Oil price possess other major challenges for oil-based economies like Nigeria and Angola. The broad based dollar strength has also had an effect on Zambian kwacha and the Ugandan shilling, which are at record low level.
If you don’t want to expose yourself to the Rand devaluation forces and prevent the value of your money to dilute, it may be the case that the only alternative remains the US Dollar.