Currency volatility: why it's a problem

High currency volatility makes it difficult for businesses to plan and budget, according to Michael Keenan, head of forex research at Standard Bank.

"Importers and exporters have to do cost planning for their businesses and a huge part of that cost is not only the product or the service they are offering, but also the exchange rate," he said.

"So if they do not get the exchange rate right when they hedge, or they do not hedge, their competitors could beat them with a more competitive offering based purely on the exchange rate."

Keenan said that SA was one of the few emerging market countries that has not taken steps to curb portfolio inflows - unlike Brazil and certain Asian countries have done - and this had made the rand particularly vulnerable to appreciation and volatility.


Brazil upped its so-called "currency war" this week by announcing it would extend a 6% tax on repatriated foreign borrowing to loans and bonds with a maturity of up to 720 days, from 360 days.

In what was seen a tacit endorsement of capital controls, the International Monetary Fund proposed its first guidelines on the use of measures to control inflows of speculative capital this week.

"Foreign investors know they can come in and buy South African bonds or equities and leave the country as quickly as they arrive," Keenan said.

"Rand volatility is likely to remain fairly high until SA starts going down the capital controls route, or if other emerging markets begin to relax their recent capital control measures."

But whereas the rand is one of the world's more volatile currencies, it is still less volatile, and thus less risky, than some other investments.

Warren Geers, general manager of currency trading at the JSE, said the volatility of the rand's exchange rate to the dollar was low compared to the volatility of the JSE's top -40 index.

Source: Time Live