Analysis of the Underlying Reasons for the Continued Weakening of the South African Rand in 2023

In the foreign exchange market, many investors habitually focus on major currencies such as the US dollar and euro, but the South African rand (ZAR) as a risk asset currency often exhibits completely opposite performance during periods of global financial turmoil. Especially since 2023, why has the rand been continuously falling become a hot topic in the market? In fact, behind this lies complex economic and geopolitical factors.

Basic Characteristics and Risk Profile of the Rand

The rand is the official currency issued by the South African Reserve Bank, operating under a managed floating exchange rate system since 1974. Unlike traditional safe-haven currencies, the rand has typical risk asset features—when global capital flows into developed economies like the US, funds are withdrawn from emerging markets, putting downward pressure on the rand; conversely, when capital flows into emerging markets, the rand has opportunities to appreciate.

This characteristic makes the rand extremely sensitive to global financial sentiment. Over the past 20 years, the rand has experienced more than four major cycles of sharp appreciation and depreciation, with single fluctuations exceeding 50%. As of early 2023, the stock of offshore funds denominated in rand still exceeds NT$208.1 billion, demonstrating its recognition among Taiwanese investors.

However, this highly volatile double-edged sword characteristic means that in years of increased economic uncertainty, the rand often bears the brunt of selling pressure.

Why Has the Rand Been Falling Throughout 2023: Macroeconomic Analysis

First, South Africa’s domestic economy faces multiple challenges

According to budget data disclosed by the South African Treasury, the country’s government deficit continues to widen, and debt burdens increase. Meanwhile, core CPI shows a downward trend. This combination usually signals that the central bank faces easing pressure. But South Africa’s economic growth is driven by relatively high interest rates—once the central bank begins a rate-cut cycle, the rand loses its interest rate support, leading to further depreciation.

International rating agency Moody’s has stated that South Africa’s long-term power crisis will lead to a negative credit outlook, further weakening investor confidence in South African assets.

Second, uncertainty in the Federal Reserve’s policy outlook

Although the South African central bank has followed the Fed’s rate hikes over the past year, data shows that during the two periods when the Fed shifted significantly, South African interest rates experienced more drastic cuts. In other words, if the Fed stops raising rates or even begins cutting, the South African central bank’s rate cuts tend to be larger, which is directly bearish for the rand exchange rate.

Third, instability in the global financial system

In early 2023, a series of risk events in the global banking sector triggered widespread concerns about financial system stability. Factors such as inverted US Treasury yields and banking crises transmission have intensified risk aversion among investors. Under this background, funds naturally withdraw from emerging markets and flow into safe-haven assets like the US dollar, making the rand, as a typical risk asset, subject to sell-offs.

Multiple Investment Paths for the Rand

Despite uncertain prospects, there are various options for investing in the rand, and investors can choose flexibly according to their risk preferences:

Time Deposit Plans: Placing a fixed deposit in South African rand at banks is the most traditional approach, with interest rates generally around 5.5%, available at banks in Taiwan. The advantage is guaranteed liquidity, but the drawbacks include high deposit thresholds and obvious depreciation risks. High interest rates often require minimum deposit amounts to enjoy.

Fund Allocation Plans: Rand-denominated funds, such as rand-denominated bond funds, attract risk-averse investors. Compared to fixed deposits, fund fees are lower, and investment scope is broader, but dividend rates are not fixed and are susceptible to exchange rate fluctuations. Usually, there is also a 3%-5% currency spread cost.

Forex Margin Trading: This is currently the most flexible trading method in the forex market. By trading currency pairs like USD/ZAR with margin leverage, the capital threshold is low (starting from very small amounts), and trading is not limited by time or location, completed online 24 hours. For volatile assets like the rand, margin trading can capture upward opportunities and seek short-selling profits during declines.

Core Factors Influencing the Rand’s Trend

Commodity Cycles and the Performance of the US-China Economy

As a major exporter of precious metals and a tourist destination, South Africa’s economy is highly correlated with commodity prices and the economic performance of China and the US. When China and the US grow synchronously, the rand tends to perform relatively strongly; otherwise, it faces pressure.

Geopolitical and Black Swan Risks

South Africa’s economy is highly sensitive to domestic and regional geopolitical risks. Any unexpected negative news can become a bearish factor for the rand. Power shortages, social instability, and other issues always pose potential threats.

Global Risk Sentiment

As a risk asset, the rand’s performance is directly affected by expectations of financial crises, the strength of the US dollar, and capital flows into emerging markets.

2023 Outlook and Opportunities for the Rand

Strategy analysts at Société Générale forecast that the rand will lead emerging market currencies higher in 2023, with a year-end target of 16.50, while other emerging currencies are expected to decline by an average of 2.5%. Chief economist at Standard Bank believes the rand has a chance to rebound to 16.40, reasoning that the market generally perceives South African assets as undervalued and that the US dollar may weaken.

Market consensus suggests that if USD/ZAR breaks through historical highs, there is potential to push towards 20; but if the situation remains unfavorable for the dollar, the exchange rate could fluctuate around 16—an important support level on the monthly chart.

Risks of Investing in the Rand

1. Exchange rate volatility risk: The rand’s value is influenced by both domestic economic conditions and global financial environments, especially its sensitivity to the US dollar. Investors should beware of situations where they profit in rand but lose in Taiwan dollars.

2. Interest rate decline risk: As the South African central bank may initiate a rate-cut cycle, the attractiveness of the rand’s interest rates will significantly decline, posing a direct threat to investors in fixed deposits or bond funds.

3. Trading cost risk: The currency spread between the rand and the NT dollar is usually between 3%-5%, sometimes higher, which can significantly erode investment returns.

4. Trend direction risk: The rand often experiences consecutive large upward or downward trends. Misjudging the trend and holding positions too long can lead to substantial losses.

5. Policy and black swan risks: Long-term power issues, credit rating downgrades, and any unexpected negative news can trigger sharp declines.

Investment Decision Recommendations

Given the ongoing uncertainty in the global economy in 2023, the question of why the rand has been falling cannot be answered definitively in the short term. Until the Federal Reserve’s policy direction becomes clearer and global financial risks dissipate, investors are advised to:

• Be patient and wait for clearer market signals before acting;
• Fully assess their risk tolerance and avoid blindly chasing high yields;
• Diversify investments appropriately to avoid over-concentration in the rand;
• Keep close watch on Fed rate decisions, South African Reserve Bank policies, and key global financial risk indicators.

There are indeed opportunities in investing in the rand, but only if investors possess sufficient risk awareness and market judgment. Under the current circumstances, caution is preferable to rashness.