South Africa’s rand under siege

As global heavyweights like China and Japan are managing their exchange rates more actively, free-floating emerging-market currencies like South Africa’s rand are bearing the brunt of a stronger dollar and risk-off sentiment.

This means the rand’s volatility is increasingly becoming more a function of what other countries’ central banks are doing, rather than a pure reflection of what is happening domestically.

Citadel Global managing director Bianca Botes recently outlined the dynamics playing out in the “quiet currency wars”.

Botes pointed to three countries in particular – Japan, China, and India – that are taking an increasingly more active role in managing their currencies.

This involves a combination of direct intervention, capital flow restrictions, and monetary policy, with the influence calibrated as much for exchange rate stability as for domestic inflation targets.

Simply put, some countries’ central banks are artificially propping up their currencies to prevent them from falling too quickly.

“The cumulative effect is a global currency environment where market price discovery is quietly being overridden and where the countries that are not intervening – South Africa included – are absorbing the consequences,” she said.

According to Botes, Japan offers the clearest example of this dynamic, with the Bank of Japan having spent much of 2024 defending the ¥160/USD level through direct intervention.

The Asian nation has also burned through its foreign exchange reserves at a pace that drew attention from the International Monetary Fund. 

Despite Japan’s efforts, Botes said the underlying problem has not been resolved. 

“Japanese monetary policy remains the loosest among developed market central banks on a real-rate basis, which means the yen carry trade – borrowing in yen at near-zero rates to invest in higher-yielding assets elsewhere – remains structurally attractive,” she said. 

“Every time that trade unwinds, as it did violently in August 2024, it sends shockwaves through asset markets that have nothing obvious to do with Japan.”

The graph below shows the South African rand, the Japanese yen, and the Chinese yuan against the United States dollar in the year-to-date, with the local currency clearly more volatile.

The rand pays the price

Another example of this dynamic is China, whose management of the yuan is more deliberate and, according to Botes, less apologetic.

She explained that the People’s Bank of China (PBoC) sets a daily fixing rate for the currency and allows it to trade within a narrow band around that fix. 

Therefore, when the yuan faces depreciation pressure, the PBoC adjusts the fix to slow the move, intervenes through state-owned banks in the offshore market, and occasionally tightens restrictions on capital outflows. 

“None of this is covert – China has never pretended to have a freely floating exchange rate,” she said. 

“The effect on trading partners is the same regardless of how it is publicly positioned. A managed yuan that absorbs dollar strength more slowly than it otherwise would, exports deflationary pressure to everyone competing with Chinese goods.”

Regardless of how these countries influence their currencies, the effect is that countries sitting outside the system are the ones absorbing the adjustment.

“When the yen is kept from weakening as fast as fundamentals suggest it should and when the yuan is managed to limit depreciation, the currencies that float freely take a larger share of the impact from the dollar’s movement,” Botes explained. 

Since South Africa does not intervene in its currency market in any meaningful way, and the Reserve Bank does not have sufficient reserves to do so sustainably, the rand is among the currencies that take a larger hit.

In addition, South Africa’s open capital account means the rand reflects global risk sentiment, commodity prices, and dollar dynamics in real time. 

“When major economies are quietly capping their own currency weakness, freely floating emerging-market currencies tend to overshoot on the downside during risk-off episodes,” Botes explained. 

“As such, the rand’s volatility is partly a function of what other countries’ central banks are doing, not just what is happening domestically.”

Botes said the broader consequence of this is that currency signals are being suppressed as economic information. Normally, exchange rates reflect relative economic conditions and adjust to absorb external shocks.

However, when they are so closely managed, the adjustment has to happen somewhere else – in growth, inflation, or asset prices. 

“The countries doing the managing avoid short-term pain but delay the adjustment, and the countries absorbing the spillover get more volatility than they generate,” she said.