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One week into the new year, South Africa is sitting with a stock exchange down 5% and a rand that has hit its lowest level in history against the US dollar. More importantly, the currency stayed there.
The combination of a falling rand and a slight jump in dollar gold prices did help to push South Africa’s effective gold price in rands to a historic record of R573 000 per kilogram by Friday.
Although the rand briefly weakened to more than R16 to the dollar late last year after President Jacob Zuma fired Nhlanhla Nene as finance minister, this week was the first time it traded at that level consistently.
The SA Reserve Bank publishes a daily rand-dollar exchange rate that gives an average rate at which exchanges actually took place. On Thursday, this rate shot up to yet another record of R16.04 and on Friday it improved slightly to R16.03.
The Reserve Bank’s alternative measure of rand performance against the currencies South Africa actually requires for its international trade – which is mostly with Europe and China, not the US – had a less dramatic week.
While the rand had, by Friday, fallen 38% against the dollar compared with a year ago, it fell “only” 22% against this nominal effective exchange rate, which better represents the inflation of import costs.
President Zuma is not to blame this time: the world’s markets roiled after China’s major stock exchange threatened to go into another free fall.
The world’s most important exchange rate, the Chinese yuan to the dollar, managed to send shock waves through the world by moving a mere 1.5%.
The yuan is managed by the Chinese government and only allowed to trade within 2% of the official rate announced every morning.
The fact that the government actually allowed this much devaluation spooked traders worldwide into believing the Chinese were trying to prop up the economy by devaluing their currency – essentially betraying inside knowledge of slowing economic growth.
The Shanghai Composite Index ultimately fell 10% over the course of the week – a scary replay of the spectacular crash of nearly 50% in June.
Share trading was stopped once on Monday and twice on Thursday due to a so-called circuit breaker created after last year’s panic.
This simply automatically halts trading if the market falls by more than 7%.
By Friday, the Chinese government had scrapped the circuit breaker and restored calm by doing the opposite of what it was suspected of trying to do: it appreciated the yuan slightly.
