South African Rand Declines Sharply

Following a rapid withdrawal of Japanese retail investors, the South African rand plunged by nearly 9 percent on Monday. The sharp decrease brought the South African currency to an all time low of 17.91 against the USD. The rapid decline follows a similar one in August of 2015, which at that time brought the rand to 14.0/USD.

The crash in the value of the South African rand has been widely attributed more to a low trading volume than any inherent devaluation of the currency. Trading conditions immediately prior to the crash had been defined by low liquidity, further contributing to the sudden drop in value when the Japanese positions on the rand were closed. In a broader context, however, the general loss of value in the currencies of South Africa and other developing economies has been seen as a reaction to China’s economic slowdown and the subsequent adjustments in worldwide investment.

In the past six months, during which the global economy has been widely damaged by decreased commodity consumption in China, the rand has gradually lost more than a quarter of its previous value. The connection between the two lies in South Africa’s large commodity production sector. While investors have been eyeing South Africa as a speculative prospect for more industrial and technological development, the country’s economy is still highly susceptible to commodity price fluctuations.

South Africa is not the only African nation to have suffered in the recent global economic downturn. Nigeria, for example, has pursued monetary policies that have kept its currency, the naira, artificially propped up in the global currency market. Many African economies, much like South Africa, are dependent upon commodity sales and therefore have gone into a period of decline because of the overall decrease in the prices and demand of raw materials.

The value of the rand in the foreign exchange market remained low going into early trading on Tuesday. Investors and currency traders have largely kept themselves out of the currently volatile market until prices begin to stabilize. Owing to the continued downturn in China, it is likely that the currency, as well as South Africa’s economy, are in for a period of decline until commodity prices begin to return to a more normal level.