Global currency wars and the ZAR

South Africa is a small player in the global currency war with neither power nor ammunition to affect matters greatly. As such, the value of the ZAR (South African Rand) is going to be determined offshore and there is little that the local authorities can do about it. In fact, it looks increasingly likely that the ZAR will remain strong — even if global policy-makers put together a coordinated response to the currency problems.

Two global currency problems

Global concerns over currencies revolve around two issues:

1. Unhappiness with the level of the Chinese yuan (CNY). This has been most evident in the US, where the administration’s rhetoric is becoming more critical and where Congress is getting closer to passing a bill allowing US corporates to request tariffs on imports from China that are unfairly helped by the undervalued CNY. Both European and Japanese policy-makers have also expressed concerns over the CNY’s level, implying political support for the US although not necessarily a similar policy response.
2. Unhappiness in many countries, e.g. South Africa, over currency strength (essentially against the USD, EUR and GBP). The cause here is economic weakness, fiscal problems and above all easy monetary conditions in the core economies that have led to capital flows to other countries. Many have responded by unilaterally trying to stop their own currencies from appreciating; Switzerland, Japan and Brazil are the most prominent examples. These actions have been spectacularly unsuccessful.

Underlying both issues is that all countries want a weak exchange rate. The global economic crisis has severely weakened demand almost everywhere, making exports the most obvious channel to grow ones economy. By definition, of course, not everyone can have a weak currency. In the extreme this leads to a race for the bottom — a round of competitive devaluations. ...

Read more in the SA Rand Merchant Bank Special Report on Global currency wars