The SA Daily
06 February 2019
Rand driven since 2012 by almost only SA risk
- The VIX index (which measures global risk aversion) has been stable, even receding from December’s peak, and this despite Brexit, US-China trade, and downward global growth revisions. Clearly, the markets don’t quite yet expect a global recession. Nevertheless, global growth slowing down could trigger risk aversion, with fall-out for SA financial markets and specifically the rand.
- Before 2012, the rand shadowed VIX movements. However, since 2012 the rand has been diverging from the VIX, weakening but with the VIX still being stable.
- This seems to indicate that before 2012, SA risk was broadly correlated with EM macroeconomic risk; so, when global risk aversion spiked, the rand would serve as a proxy hedge. However, since 2012, SA idiosyncratic factors seem to have negated this correlation. Indeed, any spike in the VIX, led by say a particular global event, can trigger a rand sell-off.
- SA idiosyncratic factors are: Eskom’s dire financial situation and unpredictable supply capacity; structurally weak economic growth; as well as pervasive political and policy uncertainty decimating business and consumer confidence.
- We conclude that in spite of global risk aversion being relatively stable, the rand’s performance is now being largely directed by SA-specific risks.
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