The rand has become a moving target over the past two years, first shocking people with how quickly it could plummet to levels never seen before against all the major countries and then, in 2002, becoming the best-performing currency in the world.
These wild gyrations have left South Africans with their own sense of shock and awe and little idea about where the "true" level of the rand is likely to be in the future.
Betting on the currency's future value has become a national pastime but the downside is that business, overseas travellers and anybody who has to make serious investment decisions based on its likely future direction has little chance of getting it right. Investment for the future is the casualty of volatility.
The rand firmed 33,3% against the US dollar during the year to end-April 2003, 14,7% against the euro and 9,5% against a trade-weighted basket of currencies.
In early May, however, signs of weakness began creeping into the currency again before it could breach the psychologically significant R7 level. Yet there are pundits who still expect the currency to strengthen further than R7.
The International Monetary Fund voiced a more tempered view, saying the local currency's fair value was about R7,80 in March when taking into account purchasing power parity factors, such as real interest rate differentials.
The main factors driving a firmer rand have been the weaker dollar and the wide interest rate gap between SA and all developed and most emerging-market economies.
The dollar lost its traditional status as a safe haven earlier this year when it was clear that the US economy had entered troubled waters and war got under way in Iraq. Since then the dollar has traded down to four-year lows against the euro and all indications are that the world's dominant currency is likely to continue on a losing streak until the US economy turns the corner and geopolitical uncertainties fade.
The greenback's weakness primarily stems from the fact that it needs to attract $1,5bn/day to feed its current-account deficit, which is deeply in the red. But the huge foreign investment inflows the US saw at the start of the millennium have all but dried up because stock market returns and prospects are not looking compelling. This is worsened by the negative interest rate differential that exists between the US and the EU.
US interest rates are at record lows and may fall even further if the Federal Reserve doesn't see the turnaround it expects.
In contrast to the US, high real and nominal interest rates in SA have attracted significant foreign investment inflows into the bond market. With the prime rate at 17% and real rates at around 6% it is an advantage that will not disappear quickly, even if Reserve Bank governor Tito Mboweni does reduce rates a few percentage points this year as expected.
It was widely believed that though Mboweni had delivered a hawkish monetary policy message at the monetary policy committee update, he would still reduce the repo rate by a percentage point in June, as Top Companies was going to press, because of the combined pressure put on the country's growth by a strong rand and high interest rates.
There has been vociferous debate about the strength of the rand. This has highlighted the adverse impact the much firmer currency has had on the export industry and, inevitably, SA's growth prospects (see page 182).
But the authorities have to let the rand run its course. Mboweni's hands are tied because he has said the central bank will not intervene in the foreign exchange market to try to affect the value of the rand. The Bank did buy dollars earlier this year to reduce the size of the net open forward position but these activities were limited and for a specific purpose.
For the sake of certainty, the rand ideally needs to stabilise for long enough to allow expectations to adjust to a new reality - the idea that the currency may, at times, strengthen and will no longer automatically depreciate by 10%/year or more.
