Navigating ZAR Volatility

When there are low levels of risk in the market, investors are attracted to high-yield, high-risk currencies such as the South African rand. When risk levels are high and there’s more uncertainty in the market, those same investors tend to shift their focus to safe-haven currencies such as the US dollar or Japanese yen. That’s the nature of risk-on/risk-off trading… But what does it mean for organisations that do cross-border business? How do they manage their foreign exchange (FX) risk while navigating the turbulence and volatility of the ZAR?

“The rand is a very interesting animal,” says Chris Paizis, Head of Corporate FX and International Banking at Absa Group. “The extreme volatility during the peak of the COVID-19 crisis showed us how mature the market is, and how liquid and efficient the rand market is, specifically. We’ve reached a point now where if the rand is not being volatile, people complain! That just shows how the rand has become a barometer for emerging market risk; and it explains why we have so much movement in the currency, whether it’s risk-on or risk-off.”

Paizis says that the COVID-19 crisis revealed – or confirmed – a few things about currency markets in general, and the rand in particular. “When it looked like the rand was going to break below ZAR14/USD, exporters got worried, while importers felt hopeful,” he says. “Not too long after that, a global risk-off environment hit and some predictions had the rand up at ZAR16/USD. The exporters were feeling happier, and the importers were getting a bit concerned. The good news during that period of unprecedented volatility was that, as mature as the rand market is, we found that our clients had also matured in their hedging approach.”

Paizis emphasises Absa’s approach that corporates should have a risk management policy, and that they should stick with it regardless of the currency market turbulence.

“It doesn’t matter if the rand swings by 20 or 30 cents,” he says. “If you stick to your risk parameters, you’ll get through it. The COVID-19 crisis was a fantastic example of that. We stayed very close to our clients and worked with them on building the appropriate structures.”

With those parameters in place, Paizis says that clients were able to use the FX tools available to them appropriately. “Whether you’re an importer or an exporter, it’s beyond just spots and forwards. You can use participation structures, and if you do it within the prudent parameters of your risk policy you will get through the crisis,” he says.