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Foreign Exchange South Africa The Currency In Essay

Foreign Exchange South Africa

The currency in South Africa is the rand. The rand is a free floating currency meaning that there are few controls on the value of the currency. While the rand is a reference currency in the southern Africa region, it is not considered to be a "hard" currency. The performance of the rand against the USD in the past year is as follows:

The chart shows the downward trajectory of the rand against the dollar. A year ago, the rand traded at 7.73 to the dollar, and today it is 9.12, a decline of 18%. This bodes well for a manufacturing operation in South Africa, where the already-low labor costs would be decreasing over time. It does not bode well for selling in South Africa, however, as the country's currency continues to get weaker, which means profits from South Africa will be worth less in dollar terms.

The trend is fairly clear. The underlying fundamentals of the rand continue to be weak. There remains doubt about the Zuma government's ability to deal with corruption, which along with crime and poverty remains an obstacle to growth. Given that there does not appear to be much opportunity...

The rand should deteriorate a further 10% against the dollar this year, which is higher than the expected rate of inflation, which means that the rand will depreciate in real terms. The exchange rate with a 10% decline would be around 10 rand to the dollar.
Japan

The Japanese yen is considered to be a reserve currency. This means that not only does it float freely, but that it is also widely traded and widely held by central banks as a store of value. The market for the JPY/USD pairing is very liquid. The trend line for the yen for the past year is as follows:

This shows the yen had a stable stretch, but has been on a decline since around the end of September. The yen was at 81.03 a year ago, but is at 98.84 today. The yen therefore has depreciated 21.9% against the dollar in the past year. This trend might well continue. While Japan has a strong economy, its economy lacks growth. Japan has also been experiencing deflation, so in real terms the yen has become even weaker against the dollar than the exchange rate would indicate. This lowers…

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The Chinese yuan is not a floating currency. Its exchange rate is managed heavily by the Chinese government and as a result trades within a band set by the Chinese government, on a soft peg to the U.S. dollar. China's currency manipulation may perpetuate the band, but the country is under severe inflationary pressure. This puts the yuan on a steady, long-run appreciation, which can be seen in its chart for the past year:

The yuan one year ago traded at 6.29 to the dollar and today it trades at 6.23. This represents an appreciation of 0.9%. The country face high inflation for much of the year, but that inflation is reported to have dropped to 2.1% in March 2013. This inflation rate is not much different than that of the U.S., which would imply that the exchange rate should remain fairly stable. However, the overriding factor is China's currency band, which is likely to be maintained for the foreseeable future. As a result, the yuan will appreciate in the next year, but only by around the same amount as last year, so that the rate will be around 6.17 yuan to the dollar.

Overall, China represents the best option for Dorchester for selling it televisions. This is almost by default. South Africa is facing a weakening rand amid economic uncertainty. The country still has potential, but the timing is wrong given that the macroeconomic conditions are tough and the rand is depreciating faster than the inflation rate. The situation in Japan is worse. The economy might be better, but the yen is depreciating and there is deflation in the economy. This is bad news all round, and earning yen right now it not wise. This leaves China. China has its own problems -- growth is slowing and currency controls mean that there is a difference between earning yuan and being able to return those earnings to the United States. However, the slow appreciation of the yuan and some overtures to convertibility highlight the reality that China is a fairly safe country in which to invest, in terms of currency exchange rate expectations.
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