These days, switching on the radio brings more doom and gloom than good news stories. Political uncertainty, rising unemployment, rating downgrades – we all hold our breath to hear how the rand is faring against other currencies – because the increase and decrease of a currency’s value can have far-reaching effects that affect your pocket and ultimately impact the economy.
So, what causes a currency’s value to fluctuate? To unpack this, we caught up with Chris Gilmour, an investment analyst with Absa Wealth & Investment Management.
First things first, what shapes currency movements?
There are quite a few factors. These are a few of them:
- The trade balance is one of the main factors. This is the calculation of a country’s exports minus its imports. When a country’s imports exceed its exports, the subsequent negative number is called a trade deficit. When the opposite happens, a country has a trade surplus. The trade balance helps to understand the strength of a country’s economy in relation to other countries.
- Another factor is the political climate of a country. Political stability, especially in emerging economies is very important. But not just in emerging economies – look at what happened in the UK in the wake of Brexit. A political decision to leave the EU ended up having huge ramifications on the pound.
- Inflation also plays a part. If your inflation rate is very high, then the value of your currency is going to be eroded. South Africa’s inflation rate is relatively higher than that in the US, that’s why the rand is weaker than the dollar.
Why do some countries’ currencies fluctuate while others don’t?
Most countries have no exchange control, that’s why their currencies fluctuate in relation to the dollar. Countries like South Africa operate a flexible exchange rate system, which means the value of the rand is determined by the market forces of supply and demand. The demand for a currency relative to the supply will determine its value in relation to another currency.
In certain countries, you have fixed exchange rates, like the United Arab Emirates, for example. Their dirham is pegged to the dollar, meaning it doesn’t fluctuate at all. Such countries have very stable and predictable economies. Not a lot of countries have fixed exchange rate systems – it’s mainly oil-producing countries and ones with small populations.
How does the strength or weakness of a currency affect the ordinary person?
The strength or weakness of a currency always reflects on the prices of goods. If a country’s currency is weak and it imports more and more into the manufacturing process, the cost of the finished goods becomes significantly higher than it otherwise would have been. But if you’re able to manufacture more of your inputs locally, you’ve got a good chance of keeping prices stable and inflation low.
On the other side of the coin, if the currency is stronger, finished goods easily become cheaper.
With the volatility of the rand, many are looking elsewhere to invest their hard-earned money. Daniel Buntman, Absa’s head of international banking, explains how you can use foreign currencies as a tool for saving.
What does saving in foreign currency offer?
Allocating some of your savings can help protect your assets and wealth against the ravages of currency depreciation. International savings gives you the chance to insulate yourself from some of the impacts of currency fluctuations, especially those who travel or send money to family overseas.
How can I invest in foreign currency?
International Saving might sound like something that is exclusively for the wealthy minority, but Buntman stresses that this is not the case. He speaks of the Foreign Currency Investment Account as a tool that ‘democratises savings because it gives you the personal freedom to quickly, easily and conveniently put some of your hard-earned savings in foreign currency – it’s all connected to your online banking and is quick and simple to use.’ The world is the rand’s oyster, as you can choose from 17 different currencies, including the dollar, pound and euro. Absa is also proud to be the only big bank offering an African currency savings account (Botswana’s pula) in easy reach – just a few clicks. Earn in rands and save in dollars, euros, pula and any of 14 more…
Does that mean my money is overseas and inaccessible?
Not at all. You still have easy access to your money (there are certain fees applicable depending on how you access it) and can manage your balance sheet from your online banking profile. Buntman is also quick to point out that this type of foreign investment can be considered ‘pro-South Africa’ as the money does not leave the country like other offshore accounts.
What about SARS and SARB?
Good news – The SA Reserve Bank allows any adult in South Africa R1 million to be invested or spent in offshore currency each year, all without the need to provide additional documents. You do need a tax clearance certificate from SARS to take advantage of the foreign investment allowance that allows you to invest up to R10 million per calendar year. Buntman adds that there are lots of intricacies with Exchange Control so don’t hesitate to call in or walk in with any queries.
Apply for your Foreign Currency Investment Account here.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.