What causes the rand to strengthen or weaken? It's a complex cocktail of factors including political stability, economic performance, interest rates, global market sentiment and the performance of powerful currencies like the dollar. It’s all largely out of our control, but when the currency does flex its muscles or take a nosedive, it can affect everything from grocery shopping to holiday plans.
Imported goods and services
All those cool gadgets, fancy clothes and luxury cars that come from abroad… When the rand is stronger, importing these items is cheaper and those savings (sometimes) get passed on to you. But when the rand takes a dip, those same items become a lot more expensive. Getting your hands on that new smartphone or pair of designer jeans will put a strain on your wallet and make it harder to stick to your budget.
Fuel price
Fuel is another area where currency fluctuations can hit hard. Since South Africa imports a significant amount of fuel, and the global price of oil is in dollars, when the rand slides against the US currency it costs more to buy the same amount of fuel. That extra cost gets passed on to you at the pump.
Higher fuel prices don’t just affect your monthly petrol bill – they also drive up the cost of transportation and shipping, which can lead to higher prices across the board. Yup, a weak rand can make everything more expensive.
Travel and tourism
Dreaming of a holiday abroad? Hmmm. The strength of the rand can make or break your travel budget. If you’re thinking of going to Europe or the US, especially, a weaker rand might make that trip impossible. You might have to cut back on your plans or reconsider your destination.
Savings and investments
The relative strength of the rand also plays a role in your savings and investments, especially if you have assets in foreign currencies. A stronger rand can mean lower returns on your foreign investments when converted back to rands, but it can also be a great time to buy foreign assets at a ‘discount’.
If you have local investments, the impact can be mixed. A weaker rand can be great for South African companies that export goods, as they earn more in foreign currency, which can boost their profits and stock prices. However, it can also lead to higher inflation, eroding the value of your savings over time.
Inflation and interest rates
Speaking of inflation… As the general cost of everything rises, this puts a huge strain on household budgets and makes it harder to save for the future.
To combat rising inflation, the South African Reserve Bank might raise interest rates, which means you’ll have to pay more each month in interest on any loans you might have. Your home loan, for example, can quickly become much more expensive.
In short
While you can't control the ups and downs of the currency market, you can be proactive with your financial planning. Use 22seven to create a realistic budget that leaves some buffer for unexpected price increases. And chat to a certified financial advisor about how you can save and invest to protect yourself from the worst of the fluctuations.