Author: Hadyn Little (Foundation Fund Managers www.foundationgrp.co.za)
The Rand has resembled a punching bag over the past year or two and its woes are never far from news headlines, but what does this actually mean for you and me individually?
2015 was one way traffic as the Rand gave up 30% against the Dollar with almost no respite over the 12 month period, but 2016 has been a very different story. Yes, there has been weakness this year (and the very real threat of even more!!), but there have also been pockets of Rand strength. So, given the volatile nature of the Rand this year how does this impact us in everyday life? Some of the impacts are obvious, but others are hidden yet no less important.
- The most obvious impact is for those businesses who participate in the import or export sectors. If your business imports raw materials, capital equipment or finished goods then staying closely in tune with the Rand’s fluctuations is of paramount importance. As an example I had a client who calculated his costs at €17.20 before quoting his local client, and this off a sizable import invoice of €110 000 to pay a few months down the line. Local political headlines quickly drove the rate to €17.80, and I can promise you that my client was in a mild state of panic. My advice is if you have a big invoice payment to make, or a fixed cost to adhere to then fixing your rate forward is essential.
- For those individuals looking to externalise a portion of their wealth then knowing what factors impact the exchange rate is key. If possible, it is advisable to have approximately 30% of your investible wealth in a hard currency (USD, GBP, EUR, CHF, JPY) but if you are about to send monies offshore for the first time then it obviously doesn’t make sense to do so when the rate is high. While predicting what the rate will do is an impossible task there are markers in the economic calendar that impact the Rand. FED monetary policy announcements, our SARB monetary policy announcements, US employment figures (first Friday of every month) and various others will drive Rand action so be mindful of these before going offshore. For those individuals who have already taken money offshore and who are looking to send more then the exchange rate becomes very important. It is vital that you calculate what your average exchange rate is over your previous transactions so that you know when to send additional monies at a rate that will bring your average rate down. Quite simply, add up the Rand value of all your transfers and then add up the Dollar values you received offshore (assuming you bought Dollars). Divide the Rands by the Dollars and that will give your average exchange rate, and then make sure any further transfers are below this rate.
- Our inflation rate is directly linked to the exchange rate. Almost everything we buy, from food, to clothes to electrical equipment to petrol has some import component in its price. If the importer has to spend more Rands to bring these goods in, then this additional cost is passed on to the consumer. Unfortunately, we all know that the opposite is seldom true, and that prices do not come down as the exchange rate improves, but keeping an eye on the exchange rate will help you budget for your monthly expenses should the currency be in a weakening trend.
- Our interest rate is also linked to the exchange rate. This is an indirect relationship with inflation as the common ground, and the Reserve Bank has set a target of 3% to 6% inflation. At present we are above 6%, with some economists predicting a breach of 7% by year end. To curb inflation the Reserve Bank increases our interest rate which attracts foreign investment and strengthens the Rand. Almost all of us have some form of debt, and a rising exchange rate that drives inflation up will ultimately end up in higher interest rates and bigger monthly instalments.