While the rand has weakened since the results of the Brexit vote were revealed, the currency’s decline is likely to be short-lived and it is expected that the currency will strengthen again in future.
The current currency volatility exists because many traders and speculators did not anticipate the UK’s exit from the EU. The surprise element exacerbated the markets’ reaction to the results through a combination of currency flowing to the dollar as a safe haven, traders and speculators liquidating positions, and others following the trend due to uncertainty about the impact of the situation.
On the downside, while the currency recovers, the cost of imports will rise, leading to further inflation increases and very likely also an interest rate hike at the end of July. Even if the situation is short-lived, it also does not bode well for the economy long-term considering the threats of rating agency downgrades towards the end of the year.
The exit will also have a significant impact on trade between UK-based companies and South Africa, and may also be negatively affected by possible renegotiation of trade agreements between the UK and her EU counterparts.
However, the fact that David Cameron has said Britain’s exit from the European Union could potentially take as long as five years, market reaction and predication at this stage would be premature and we are likely to experience a long period of market uncertainty and volatility.
At the time of going to press, the JSE’s All Share Index was trading weaker, following the example of weaker European markets. This volatility, coupled with the currency weakness, can leave many investors uncertain about their investment portfolios. Regardless of the fluctuations and the uncertainty of the UK and EU’s parting, it is best to avoid making emotional investment decisions. Investors who get help from a qualified financial adviser to draw up an investment plan, based on their own goals and then follow the plan – even when markets appear to be volatile – will experience the best results.