The year 2015 will go down as one best forgotten for the rand – in fact, one best forgotten from a South African perspective – be it economically, financially, socially or politically.
December seemed to be a fitting end to a rollercoaster year, with a Fitch downgrade to a notch above junk status and very disappointing current account data being the catalyst for increased rand volatility and nervousness
The last thing that was needed was some extra impetus or bad news.
Which is just what we got – with President Jacob Zuma deciding (in his infinite wisdom) to fire Finance Minister Nhlanhla Nene and replace him with unknown yes-man, David van Rooyen.
The timing couldn’t have been worse. The result was a bloodbath – wiping billions off the JSE, sending bond rates soaring and the rand spiralling out of control. Emotions were at an extreme of blind panic and despair, mixed with outrage (prompting #ZumaMustFall campaigns and marches calling for Zuma’s recall).
Fortunately, pressure from the public and his own cabinet forced Zuma to backtrack four days’ later, with respected Pravin Gordhan being placed back at the helm of National Treasury. The rand immediately strengthened, with the JSE and bond markets also recovering, bringing some much-needed calm to the markets.
So ended a calamitous year for the rand, having lost 33.7% of its value against the dollar and being one of the worst performing currencies for the year.
This is a substantial loss of value in just a year. But we have seen these moves before. And worse.
The rand’s depreciation in 2015 is less than both the currency crises experienced in 2008 and 2001, when the rand lost 38.3% and 58% respectively against the US dollar (with 1984 being the worst on record at 61.8%).
And just as occurred in 2001 and 2008, we saw happening this time around too, with these extreme moves coinciding with extreme events coupled with extreme emotions.
The reason for this is that financial markets are moved by mass human emotion, which drives the market from one extreme to the other – from extreme optimism (complacency, hope and greed) to extreme pessimism (anxiety, fear and despair).
At major extremities of trend, people tend to make extreme, irrational and emotionally charged decisions and actions, which is reflected in the market price action – which fuels the already hyped up crowd...until everyone has given up all hope.
BUT…the darkest hour is just before dawn, and so it is with financial markets.
When the point is reached where there is nobody left to turn negative, the trend has reached its end, and a reversal occurs – as can be seen from the years following the peaks in 2001 and 2008, when the rand strengthened.
Our President has continued to fuel the negative sentiment into the New Year through absolving himself from all blame for the crisis (‘the market over-reacted’), which of course, caused the market to ‘over-react’ a little more, and push the rand to fresh lows.
The rand is now at an extreme of pattern and sentiment (how much worse could it get?), which signals that the rand is overdue for a welcome change in medium term trend in 2016.
However, there is a risk of further ‘over-reaction’ before that occurs.