“The Rand has weakened fairly dramatically over the last few months – should we be alarmed by the latest gyrations, or are these recent movements not random at all, but run-of-the-mill for an emerging market currency?”
How volatile is volatile?
Investors have become far more familiar with concepts like volatility1 and skew2 and black swans3, once the jargon reserved for “quant geeks” in the back rooms of investment banks. We understand the concepts of risk more so now than before Enron and Lehmann and Bernie Madoff became household names.
So when Gill Marcus said on 30 January 2014 she’s concerned about Rand volatility, what does this actually mean? Is the current weakness random (i.e. unpredictable) and volatile or should those investors still beholden to an emerging market currency take it in their stride?
The chart below shows the volatility of the Rand versus the US Dollar since January 2000 using the annualised rolling 200 day standard deviation as a measure. This captures the variance in Rand appreciation or deprecitation on an annual basis. It is particularly interesting to note that on this measure of volatility, the recent price move has been quite benign.
During 2001 the Rand moved from 8.40 in early September to 13.48 by December – a 60% depreciation in approximately 100 days. In 2008, the Rand was hovering at around 7.70 before the credit crisis took hold and moved out to 11.38 – a 48% depreciation again in about 100 days. At the time of writing, the depreciation over the last 100 days has been about 12%.
1 Volatility is a measure of how much variation there is in the returns or prices of a financial instrument.
2 Skew is a statistical measure of the symmetry of returns – are there as many positive returns as negative, or are the returns “skewed” one way or another.
3 Black swan is a metaphor to describe a very rare event that comes as a complete surprise.
Rand historic volatility
Of course the fact that the current move has not been volatile is of no comfort to those of us who lust after imported electronic goods, and although the current Rand price has been more of a slow slide than a hard jolt, it still hurts. South Africans with Rand denominated assets are seeing their wealth in a global context erode before them.
Home on the range
Our currency is and isn’t unique in how it behaves. We looked at the range of rolling annual returns for a mix of emerging and developed market currencies, all versus the US Dollar. Rand holders have experienced annual depreciation of 67% through to appreciation of 32% since that start of 2000. Other emerging market currencies like the Mexican Peso (MXN) and the Russian Rouble (RUB) have a similarly wide dispersion of annual returns against the US Dollar. What is also clear from the chart is that the developed market currencies, the Pound (GBP), Euro (EUR) and Swiss Franc (CHF) show visibly less volatility than their emerging market counterparts. The Rand’s unique quality amongst its emerging market peers is liquidity. That means that large foreign institutional investors find it straightforward to make the proverbial “easy money” off the Rand when global sentiment to emerging markets turns negative.
We would argue that the current Rand depreciation is not unpredictable or random. The Rand experiences periods of extreme volatility and extreme weakness. It always has done and will continue to do so. This is to be expected. What remains, is whether you as an investor are happy to be fooled by “Rand(om)ness.”