Striking correlation between load-shedding and rand weakness

A Daily Investor analysis revealed a strong correlation between increased load-shedding stages and rand depreciation.

This week, the rand fell to its worst level since April 2020 and has weakened significantly against the US dollar over the last two years.

In May 2021, the rand traded under R14.00 to the US dollar. Fast forward two years, and it has broken the R19.00 barrier.

Experts said the rand weakness is largely attributable to South Africa’s continued load-shedding and the threat of a grid collapse.

Isaah Mhlanga, head of markets research at RMB, said global events like poor data from China and geopolitical tensions affect the rand’s value.

However, he said the biggest driver had been the bad sentiment surrounding Eskom and potential stage 8 and above load-shedding.

To test this theory, Daily Investor tracked the intensity of load-shedding against the US dollar and South African rand exchange rate.

We used a centred moving average for load-shedding to accurately represent power cuts in the country.

We plotted the load-shedding moving average against the rand’s exchange rate to the US dollar, which revealed a striking relationship.

An analysis between the two data series gives a correlation coefficient of 0.71, indicating a strong positive correlation.

It tells us that rand depreciation tends to occur at the same time as the intensity of load-shedding in South Africa increases.

It shows why many analysts and economists incorporate load-shedding data into their models to predict long-term currency movements.

It is also the reason why many offshore investors closely track South Africa’s energy environment and developments around Eskom.

The chart below shows the relationship between load-shedding stages and the USD/ZAR exchange rate.