Is The South African Rand A Commodity Currency?

According to the Bank of International Settlements' (BIS), the foreign exchange market accounts for US$6.6 trillion in aggregate daily turnover.^[1] Monies of all types contribute to this enormous figure, making the forex the largest marketplace in the world. Among the most prominent are the major, minor, exotic and commodity currencies.

By definition, a commodity currency (also known as "commodity dollar" or "comdoll") is one that exhibits a quantifiable correlation to the pricing of raw materials. Metals, energies and agricultural products are examples of goods that impact the values of commodity currencies. Typically, as the pricing of the underlying commodity fluctuates, the exchange rate of the commodity dollar follows suit.

Examples Of Commodity Currencies

While the correlation between commodities and currencies is far from 100%, raw materials regularly impact the value of select international monies. In fact, several of the world's major currencies are considered to be commodity dollars:

• Canadian dollar (CAD)
• Australian dollar (AUD)
• New Zealand dollar (NZD)

In addition to certain majors, the money of developing nations can be greatly impacted by commodity market performance. A large portion of the gross domestic product (GDP) of emerging economies frequently consists of commodity production and exportation. Below are a few examples of the correlation between emerging-market economies, their currencies and commodities^[2]:

• Columbian peso (COP): Oil generates 20% of Columbia's revenue and accounts for 25% of the export sector. Subsequently, the value of the COP is positively correlated to the global oil markets.
• Peruvian sol (PEN): In Peru, copper is responsible for 24% of aggregate annual exports. Thus, copper pricing is an integral driver of the PEN's value on the foreign exchange markets.
• Russian ruble (RUB): More than half of Russia's export sector is comprised of crude oil and natural gas. Accordingly, valuations of the RUB are influenced considerably by the price of crude oil.

What Makes The South African Rand (ZAR) A Commodity Currency?

According to the United Nations, South Africa is designated as being an upper-middle income, developing country.^[3] Ranking 30th globally in terms of GDP, South Africa is the world's largest producer of platinum, gold and chromium. Subsequently, South Africa's leading exports are gold, iron ore and platinum. The cultivation and shipping of these goods abroad generates a significant portion of the US$94.93 billion in annual exports.

The commodity export sector plays an integral role in South Africa's economy, specifically as it pertains to gold, platinum, diamonds and iron ore.^[5] As a result of this reliance, the South African rand (ZAR) is widely considered to be a commodity dollar.

Metal Commodities And The South African Rand

BIS statistics from April 2019 attribute about 1% of daily forex turnover to the ZAR.^[6] Additionally, the ZAR is most commonly traded with the United States dollar (USD/ZAR).^[7] Because of the mining industry's importance in South Africa, the USD/ZAR exhibits a regular correlation to pricing trends in select metals. Aside from diamonds and coal, the following are the primary components of South Africa's mining export sector:

• Gold
• Platinum
• Chromium
• Iron ore

The ZAR and gold relationship is well known and a long-term positive correlation is readily quantified. In the four years following the Global Financial Crisis of 2008, gold entered a bull market peaking at US$1,889.70 per ounce in 2011.^[8] During this period, the USD/ZAR remained stable, largely within an established trading range between 6.5000 and 8.0000.

Upon the 2008-2012 gold bubble bursting, the ZAR struggled to hold its value. From 2011 to 2016, bullion prices fell from highs of US$1,889.70 to a low of US$1,066.80; a loss of more than 43%.^[8] As the price of gold plummeted, the USD/ZAR entered a steep uptrend. From 2 January 2012 to 1 January 2016, the USD/ZAR rallied from 8.0581 to 15.4583. This 4-year period brought a massive devaluation to the ZAR and illustrated its correlation to gold commodity pricing.

Summary

Although South Africa has been historically dependent upon the mining industry, its economic impact has decreased in recent years. From 1980 to 2016, the portion of South Africa's GDP attributable to mining decreased from 21% to 7%.^[9] This relationship has diminished the impact of metal commodity prices on the ZAR. Ultimately, the South African economy has become largely services-based, accounting for 67.5% of GDP.

Nonetheless, a significant portion of the South African economy continues to revolve around the commodity export sector. As a result, the ZAR continues to represent varying correlations to the pricing of raw materials and is classified as a commodity currency.