It is more than two weeks now since the Brexit vote which saw the United Kingdom vote with a majority to leave the European Union. Just before the referendum, the remain camp had gained mileage and most investors, political analysts and other lay people alike thought that the United Kingdom would vote to remain in the European Union. However, come the following day on Friday, the world woke up to the news that the Brexit camp had won the referendum with 52% against the 48% for those who voted to remain. As expected, markets reacted to the negative news with a sudden plunging in prices across financial markets around the world.
Among the most hit currencies the following on Friday was the sterling pound itself which lost about 9% in that single day. Second on the charts among the highest losers was the South African rand which dropped by about 7.8% on that Black Friday. This came as a shock since the rand did not drop with such high margins when President Jacob Zuma fired Nene; only falling by 5% to Nene’s firing news. However, as Moody’s has said in their latest report, South Africa is the most exposed country across Sub Saharan Africa to the Brexit. This is due to its integration to the global financial markets and the investment links it has with the financial market in the United Kingdom. It is therefore clear why the rand was the most hit by the Brexit among all the emerging markets.
A stronger rand against the pound
The South African rand did not however stay in the mud for long after dropping on the Black Friday. More than two weeks later, the rand has recovered to its previous price levels in the pre-Brexit period. Generally, the rand has gained more than 25% against the sterling pound since January this year. Part of the reason is the fact that the rand was at its lowest price levels as the year began and it is now stabilizing as the economic uncertainty and the fall in commodity prices globally are stabilizing as well. The other reason the rand has gained a lot against the sterling pound over the same period is due to the fact that the pound has depreciated a lot against most global currencies; hence resulting to an appreciation of the rand against the pound.
With the stronger rand, many South African citizens residing in other foreign countries are facing tough investment and saving decision. Ideally, a strong rand means that their purchasing power has gone up. If they exchange it for the sterling pound, they are going to get a higher amount of the sterling pounds per unit rand compared to the period before the rand started appreciating against the sterling pound. Having this in mind, South African citizens living abroad could choose to make wire payments via commercial companies to their bank accounts in the UK. By saving their money in the UK, they stand to gain when the sterling pound finally starts regaining its value against the rand. At that later time when the rand depreciates against the sterling pound, those citizens abroad could then again transfer their savings back to South Africa and end up gaining from the rise and fall in value for both currencies.
As much as the above sounds logical, the real struggle is in striking the best exchange rate between the rand and the sterling pound. Although the rand has appreciated against the sterling pound, the daily price movements and very random and the volatility adds an element of risk. This risk deters those who potentially wanted to make the money transfer to be hesitant and take longer to make that decision as they monitor the currency markets to find a stable window to cash in.
But even with the uncertainty due to the volatility in the currency markets right now, Britain has seen an upsurge in online searches for tourism travels to its tourist destinations. This happens as a result of other currencies appreciating against the sterling pound and hence increasing the purchasing power of the citizens from outside the United Kingdom when they get into the UK. For South African’s living abroad who would wish to visit Britain, this would be the best time to do so since they will be able to afford more luxury with their stronger currencies.
No one knows with certainty how the global financial markets will play out over time as the EU and UK get into talks about their divorce. However, in the meantime analysts forecast that the sterling pound will continue to be depressed against most major global currencies as uncertainty hovers over the global financial markets about Britain’s fate.