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March currency review: South African rand gets bitten twice

ECA International

President Jacob Zuma knew exactly what would happen if he sacked his finance minister, but he did it again anyway. It wasn't as if it hadn't happened before, and credit rating agencies had warned of negative consequences if South Africa's leader fired the much-respected Pravin Gordhan; nevertheless, the axe fell late last week.

Agencies were as good as their word, with Moody's immediately putting South Africa's credit status on review for a possible downgrade and S&P actually cutting its debt grading to 'junk'. The rand slumped, as Zuma knew it would, wiping out all of its recent gains and putting further upward pressure on inflation, which has been rising anyway. It seems the president's reportedly intense dislike of Gordhan trumped all economic advice.

For global mobility teams managing international assignees' salaries, this is a perfect example of how politics can affect the value of a currency, suddenly and significantly. While the world is a complex place generally, with economics providing enough uncertainty of its own, little is as unpredictable as politics.

And it isn't just developing nations where political surprises can upend the most meticulous salary calculations. The United Kingdom's unexpected referendum result on European Union membership last year saw the pound fall 20% overnight. Many predicted the dollar would depreciate sharply if Donald Trump were to win the US presidential election, but when his shocking victory actually happened, instead the dollar climbed notably.

There are countless other lessons available in recent history, too, to remind GM professionals of the folly of trying to predict exchange-rate movements. Equally, it is usually unwise to respond to sudden currency changes too hastily, because markets can rapidly bounce back, and even politicians are capable, just occasionally, of changing their minds. Funnily enough, Jacob Zuma did just that the last time he sacked Gordhan back in December 2015.

Countries experiencing largest currency losses in March
Currency code Movement v EUR
27 Feb - 3 Apr 2017 (%)
DR Congo CDF -9 44.0
Egypt EGP -15 30.2
Iceland ISK -5 2.0
Lesotho LSL -5 5.0
Madagascar MGA -5 6.6
Namibia NAD -5 7.8
South Africa ZAR -5 6.3
Swaziland SZL -5 8.2
Uzbekistan UZS -10 5.7

Other big currency fallers in March included the franc of the Democratic Republic of Congo, where political tensions and economic stagnation persist; the som of Uzbekistan, where the new government has loosened exchange-rate controls, allowing the currency to fall closer to market value; and the pound of Egypt, which was the world's weakest currency last month, as shortages of foreign currencies re-emerged following a surge in foreign investment which had temporarily relieved them.

Far fewer currencies gained in March against the euro, which bounced back as the Eurozone's economic recovery progressed, disinflationary pressures waned and unemployment fell.

Countries experiencing largest currency gains in March
Currency code Movement v EUR
27 Feb - 3 Apr 2017 (%)
Georgia GEL +4 5.5
Ghana GHS +5 13.2
Mexico MXN +4 4.9

In other news, as the selected currency movements table below shows, the Nigerian naira hardly moved in March. This was despite stern warnings from the International Monetary Fund that the economy could collapse without major, urgent reforms, including allowing market forces to dictate the value of the currency. The central bank responded by again promising to unify official and black-market exchange rates. It just didn't say when.

Venezuela has also promised to reform its currency regime, sometime this week according to reports. However, no advance details were given and no change had been announced at the time of writing (Wednesday 5 April). If there is an update on this, we'll report it in the ECA blog.

China would probably like to free up its currency too, and may soon take steps towards that aim, according to recent reports. A combination of rising US interest rates and big outflows of capital from China is making it perhaps too costly to keep the value of the yuan artificially high against the dollar. Growing numbers of economists say the authorities should let the currency fall.

Finally, just as we were going to press, the Czech Republic's central bank has removed the koruna's upper cap against the euro, a move we predicted back in January. The koruna is likely to gain in value, possibly substantially, although the bank has said it will still intervene in foreign-exchange markets if necessary.

Selected currency movements (v EUR)
Country Currency code % movement to 3 April 2017 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS 0 +2 +4 +2 40.5
Australia AUD -2 +4 +5 +6 1.5
Brazil BRL -3 +2 +8 +18 4.8
Canada CAD -3 0 +3 +4 2
Chile CLP -4 -1 +4 +7 2.7
China CNY -1 -1 +2 0 0.8
Egypt EGP -15 -1 -95 -92 30.2
India INR +2 +3 +7 +8 3.7
Indonesia IDR -1 0 +2 +5 3.8
Japan JPY 0 +3 -5 +7 0.5
Kenya KES 0 -2 +3 +5 9.3
Korea Republic KRW 0 +6 +3 +9 1.8
Mexico MXN +4 +8 +8 -1 4.9
Nigeria NGN 0 -3 +6 -47 18.6
Norway NOK -4 -1 -2 +3 2.5
Philippines PHP -1 -3 +1 -2 3.3
Poland PLN +2 +4 +2 +1 2.3
Russia RUB +2 +6 +15 +22 5
Singapore SGD 0 +2 +2 +3 0.8
South Africa ZAR -5 0 +8 +15 6.3
Sweden SEK 0 0 +1 -3 1.8
Switzerland CHF 0 0 +2 +2 0.6
Turkey TRY -3 -5 -16 -21 10.1
United Kingdom GBP -1 0 +1 -7 3.2
United States of America USD -1 -1 +5 +6 2.7
Venezuela VEF -1 -1 +5 +6 741
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