Rand Volatility Plummets as Foreign Hedging Demand Dwindles
The South African rand is the calmest it’s been in nine years, but the drop in volatility points to a troubling cause: a long-term decline in investor interest in the country.
Historical price swings in the currency often seen as a bellwether for emerging markets have fallen to less than 12%, the lowest level since June 2015.
A key factor driving this shift is the reduced foreign ownership, particularly of government bonds, which has lowered the need for investors to hedge against currency risks, according to Warrick Butler, head of foreign exchange trading at Standard Bank. “There’s less need to hedge, which reduces demand for volatility,” Butler said.
Foreign ownership of South African bonds is hovering at its lowest levels since 2011, having fallen to 24.6% in August from a peak of 42.8% in 2018, according to National Treasury data. Despite this, there are signs of renewed, albeit cautious, interest. Foreign investors have been net buyers of government securities this year following May’s general election, with inflows on track to be the largest since 2019.
Butler said that reversing the current trend of declining volatility would require a significant event, such as a surge in foreign inflows or a global financial crisis. However, sustained foreign interest would likely only return if South Africa’s economy can deliver consistent growth above 1.5%.
The continent’s most-industrialized economy has expanded by an average of less than 1% over the past decade. Gross domestic product is now expected to grow by 1% in 2024 and 1.7% in 2025, according to a Bloomberg News survey of 29 economists conducted from Sept. 20 to Oct. 7.
