The South African Rand

1
The South African Rand

• ZAR

2
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

3
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

4
One Year

• 90 day average
• Consistency bouncing between Bollinger bands
• Carried momentum once crossing the moving average

5
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

6
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

7
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

8
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.reserv
  ebank.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 currencys
  spot rate.

9
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.

10
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.transparen
  cy.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.

11
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

12
South African RandThe achievement and
maintenance of price stability SARB
13
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

14
South Africas 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.

15
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.

16
Forecasting 5 Years into the future

• European Terms
• PPP Spot Rate Current Spot Rate x (1
  infhome)n/(1 infforeign)n)
• PPP Spot Rate6.0538 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

17
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.

18
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.

19
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

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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

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The End