Foreign Exchange – The Current Landscape!

Updated: Jun 9


The Foreign Exchange Market plays a pivotal role in South Africa’s political and economic landscape.


The numerous influencing factors, such as market dynamics, and the complex ways in which they, in turn, affect the economy, make foreign exchange rates a fascinating, although not always easily understood topic. Contrary to what we may intuitively think, foreign exchange is not only vitally important to our government, Reserve Bank and small, medium, large and multinational companies, but it affects everyone, right down to private households.


Among other factors, foreign exchange rates are central to determining the cost of investing into South Africa, and the cost of all our imported goods, as well as revenue earned from our exports. This, coupled with the value of our currency relative to other currencies, have a direct bearing on the development of our economy.


Several local and international factors are currently weighing on the Rand and the South African economy. While our local challenges are vast and important, South Africa’s status as an emerging market economy results in our local events not really having a significant impact on the performance of the Rand. The main global issue currently impacting the Rand and the South African economy in general, is the devastating effect of the Coronavirus across the globe. This had a massive knock-on effect across multiple disciplines and is affecting all sectors and industries around the world.


The normal way of living and doing business has diminished, spearheading a ‘new normal’ for the future.This situation exacerbates the dire state of some of our key State-Owned Enterprises, and the impact on business and households, are placing much strain on our economy and growth prospects in the short/medium term.

The normal way of living and doing business has diminished, spearheading a ‘new normal’ for the future. This situation exacerbates the dire state of some of our key State-Owned Enterprises, and the impact on business and households, are placing much strain on our economy and growth prospects in the short/medium term.

The Bank for International Settlements (BIS) has recently published its latest Triennial Central Bank Survey, which tracks global foreign exchange activity in major markets. According to the BIS, trading in global foreign exchange markets reached USD 6.6 trillion per day in April 2019, up from USD 5.1 trillion three years earlier. The US dollar retained its dominant currency status, being on one side of 88% of all trades. The share of trades with the Euro on one side expanded to 32%. By contrast, the share of trades involving the Japanese Yen fell some five percentage points, although the Yen remained the third most actively traded currency (on one side of 17% of all trades), the BIS said.


As in previous surveys, currencies of emerging market economies again gained market share, reaching 25% of overall global turnover. Turnover in the Chinese Renminbi, however, grew only slightly faster than the aggregate market, and the Renminbi did not climb further in the global rankings. It remained the eighth most traded currency, with a share of 4.3%, ranking just after the Swiss franc,” the group said.


South Africa’s Rand was ranked as the 18th most traded currency in the world, up from 20th position three years ago.

South Africa’s Rand was ranked as the 18th most traded currency in the world, up from 20th position three years ago. The Rand accounted for 1.1% of the average daily turnover recorded in April 2019, compared to 1.0% in 2016. Over the last 15 years, the Rand has been used more in trades, despite having ranked higher in the 2004 and 2007 reports. In those years, South Africa’s currency ranked 16th and 15th overall, respectively, but only accounted for 0.7% and 0.9% of the daily average turnover tracked over the same periods. The Rand’s trade share is on par with other emerging economies like Russia, India, Brazil and Turkey.


South Africa has a very open economy and imports and exports of goods and services, contributes almost 60% to our GDP! South Africa recorded more than R 2.5 trillion in global trade during 2019, experiencing exponential growth since 1994.

South Africa has a very open economy and imports and exports of goods and services, contributes almost 60% to our GDP! South Africa recorded more than R 2.5 trillion in global trade during 2019, experiencing exponential growth since 1994. However, South Africa is also forecasting a decline in trade in line with the declining Global trade trends by the rest of the world.


One of the biggest challenges facing importers and exporters involved in cross border currency payments is how best to manage and mitigate the impact of volatile currency markets on their business operations, cost competitiveness and profitability.

Without a proper foreign exchange management policy, and a proper risk management tool, companies are not able to control the potential adverse effects of currency movements, which can lead to increased cost and reduced market share and profits. Naturally, the needs of companies will differ from company to company, depending on various factors, including turnover, mandates, costing models, etc.


The demand for Forward Cover/Hedging depends on expectations for the currency, the risk appetite of the business, and to what extent price increases, created as a consequence of exchange rate fluctuations, can be passed through. Companies with low-risk appetites will take Forward Cover on all their exposures as they arise. Companies with a higher risk appetite will tend to take a view on the currency and leave exposures open.


In our experience, very few companies have any formal risk management framework documents in place and company executives rely on hope and greed in the execution of their foreign exchange exposures. The “when” and “how” to buy foreign exchange is usually an emotional issue and is normally done on a reactive basis by organisations involved in global trade. Importers that have been exposed during the latest Rand depreciation are probably hoping that the currency will recover and are therefore waiting it out. Similarly, some exporters are thinking that the Rand will continue to weaken and are therefore also trying to delay conversion as long as possible to lock in greater profits. In this example, these importers are relying on hope, and the exporters are greedy.



In contrast, companies with a proper risk management framework will be more consistent with the management of their exposures. This will result in less uncertainty over profitability and is ultimately more sustainable.


We at BeztForex believe that it is inappropriate during these difficult times to carry out hard sell activities. Nevertheless, as a service to the public, we stand ready to offer free advice, help and information on this topic. Feel free to contact us and take us up on this offer.



Herman Bezuidenhout

CEO


+27 (0)83 700 8076


BeztForex (Pty) Ltd


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