25 May 2023
While we often tend to focus on the USD/ZAR exchange rate, where the Rand has experienced significant weakness recently, the picture can be different against other currency crosses.
The chart below shows the exchange rate of the Japanese Yen versus the Rand and compares it to our long-term Purchasing Power Parity (PPP) fair value model. Through 2021 and 2022, the Rand traded stronger than our PPP fair value estimate versus the Yen, with the Yen bottoming in June 2022.
Since then, a combination of Rand-specific weakness and Yen strength has closed this gap, but the Yen still trades below our PPP fair value vs. the Rand.
Historically, South Africa has been a destination for Japanese capital, exploiting the carry trade by borrowing in Japan where interest rates and bond yields are low and investing in high-yielding countries such as South Africa. But more recently, load shedding has induced volatility in the Rand, and the prospects that the Bank of Japan may end its policy of keeping bond yields low have challenged this trade.
This picture, along with our view of accretive long-term valuations for Japanese equities, informed our overweight in Japanese stocks during the course of last year, a position that has contributed to fund performance as both the currency and equities appreciated in value.
Source: Bloomberg, Mergence
Our Market Snippets email aims to provide concise insight into our investment research process. Each week, we highlight one chart that showcases our research, motivates our current positioning, or simply presents something interesting we’ve discovered in global financial markets.
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