Believe it or not, the rand is getting boring. While we’ve been focused on lower yields and the stronger level of the rand over the past year, old hand forex traders are moaning about how dull things are getting.

What’s going on is that the volatility of the rand has fallen sharply in the post-Covid period, particularly last year, hitting a record low for the modern rand policy period (from 2002, after the rand crisis).

The “vol” measure of options prices, which is essentially linked to the standard deviation of the currency — how widely the market expects it to move around over a period — was 17.5 on average between 2002 and mid-2008, then 15.8 from 2010 to the start of 2020, and is now sitting at 9.6, having drifted steadily lower, particularly from 2023.

This has brought the measure below that of Brazil and similar peers in a sustained way for the first time. (The actual realised volatility — not just options prices — has exhibited similar shifts.)

The South African Reserve Bank has an easier time forecasting inflation with a currency that is less volatile, since extreme outcomes are less likely and it can be less risk averse in setting interest rates.

To get more technical still, market measures of the spread of views around where the currency might move in options pricing have contracted, while the so-called vol of vol — a measure of how much the volatility of the currency changes, or how much it whips around between different regimes — has collapsed.

All of this is very technical and boring, so why should anyone care? Well, everyone should care that the currency is less volatile. The South African Reserve Bank has an easier time forecasting inflation with a currency that is less volatile, since extreme outcomes are less likely and it can be less risk averse in setting interest rates.

Exporters and importers have less uncertainty to contend with around where the currency will be in the short to medium run and are less likely to face sudden rapid changes in the rate while transacting. All of this should allow prices to move less often, with less need for price risk buffers, and benefit business and consumers in general.

Easier planning

It also makes it easier for offshore and onshore investors to plan and have more certainty on where things will be in future, boosting confidence, and with it the likelihood of positive investment decisions.

We shouldn’t get too carried away though. The rand is still way more volatile than, say, an Eastern European currency like the zloty, whose volatility number is around 4, in line with India’s rupee. But still, we shouldn’t scoff either. It is a sort of victory that the rand seems to have ditched its propensity to throw the baby out with the bathwater every time there was the slightest hint of global risk-off or a major geopolitical event, which is handy given the complex, polycrisis world we live in at the moment.

Explaining this is not easy, but it is partly down to less speculative trading in the rand at the margin than in the past as hedge funds and bank trading desks revise how they deploy capital (also in response to regulation). It is also partly down to the fact that underlying liquidity in the rand is now less volatile than in the past, thanks to the Bank’s monetary policy implementation framework reforms (though I place rather more weight on this factor than I think even the Bank itself does).

Jibar, inflation target reforms

Reforms to the Johannesburg interbank average rate (Jibar) and the inflation target change have also helped but are too recent to explain the trend. Similarly, the Bank’s credibility has been high throughout the democratic era, so it’s hard to argue that an improvement there is a factor. Perhaps the market now simply has a better understanding and acceptance of the way it operates.

What has shifted is the South African government’s fiscal credibility, which has steadily climbed under the latest incarnation of leadership of the South African Revenue Service, which, while most obviously helping lower and flatten the interest rate complex, also helps reduce trader jitters and therefore volatility.

A favourite pastime of mine has been demanding that clients take advantage of the shift in the interest rate complex paradigm with the inflation targeting change and fiscal consolidation and issuance cuts. I can now add to that asking whether they understand and are taking advantage of the less volatile rand.

I do wonder how many businesses are aware of this, as opposed to just the level of the currency. In all too many conversations I still encounter something along the lines of “Mmmmm, it might be at R20/$ tomorrow”.

Job creation

It’s up to policymakers to “market” these shifts in the macro-paradigm more forcefully. They seem to not be that keen, which strikes me as weird, amounting to leaving a free lunch on the table. They can’t assume that everyone is a rational economic agent who is fully aware of everything going on. The National Treasury, department of trade, industry & competition and the Reserve Bank need to grasp the comms nettle on this and talk more about the less volatile rand.

And what about the state of the nation address? Chest thumping about being taken off the Financial Action Task Force greylist and the S&P ratings upgrade is all very well, but people and businesses are affected only through second-order impacts. The president should add a line to his speech on what the less volatile currency and lower, flatter yield curve mean for the average SMME importer, which can now plan better and, hopefully, hire more people.

Growth in South Africa is going to come from us eating every scrap of free lunch that is on the table — including reduced uncertainty and a bit of marketing magic — not just waiting for the major meals.

• Peter Attard Montalto leads on political economy, markets and the just energy transition at Krutham, a SA research-led consulting company.

This article first appeared in Business Day.