The USD/ZAR currency pair has come in for a lot of tap in recent years, and no reversal looks likely for the immediate future. The problem with the South African Rand lies in the inherent structural weaknesses in the South African economy. For starters, the nation's parastatal electricity supplier – Eskom – routinely undertakes what is euphemistically known as ‘load shedding’ to ration electricity among the country's inhabitants. Owing to a dilapidated and inadequate power sector, vast reductions to operational efficiency and productivity have finally taken their toll.

The SA economy is a labour-intensive economy; the agricultural and mining sectors comprise a major chunk of overall economic activity. This means that strikes and union matters add tremendous downward pressure to the economy. The government is locked in a perpetual struggle with the unions, adding additional stress to the ready faltering mining sector in the country. South Africa was ranked first in terms of gold production in the 1980s and 90s, but it has since dropped to 6th position on the global stage. There are many reasons for the sharp declines in South African productivity, but falling commodity prices certainly top the charts.

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SA Gold Mine Production

The problems are many, and I've specifically chosen not to address the widespread issues of crime, corruption and violence that plague the country. From a purely economic standpoint, the ZAR appears to be moribund. The last time the currency saw present levels against the USD, the GBP and other developed market currencies was back in 2001/2002. The rand recently plunged to 12.82 to the US dollar and 19.91 to the British pound. These are indeed worrying times for an emerging economy intent on avoiding the fate of its northern neighbour, Zimbabwe. It is true that the fundamentals of the SA economy differ from those of Zimbabwe, but massive unemployment, rising inflation and trends in the global market are placing the rand under tremendous pressure.

More recently, the Chinese Central Bank decided to devalue the CNY by 2 percentage points in an attempt to boost export potential for the country. By doing so, the Chinese will now be paying more per dollar-denominated commodity, meaning demand will decline. Since China is a net importer of raw materials, metals and agricultural produce – these too will decline on the global stage. South Africa is a major producer of gold, coal, iron ore, manganese, copper et al. With China being the world's second-largest economy, and ranking close to first in terms of its appetite for commodities, South Africa will experience export declines. The fact of the matter is that countries competing with China will now be experiencing additional financial weakness.

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ZAR/CNY Exchange Rate August 2015

Viewed from another perspective, it's easy to see why demand for commodities will decrease on the global stage. Since mainland Chinese consumers will now be paying more out-of-pocket for commodities, they will be demanding less. Commodities markets are highly volatile, and the decline in the exchange rate of the USD/ZAR currency pair should not move beyond a 2% – 5% range. The rand has suffered against a broad basket of currencies in 2015, driven in part by dollar strength, a resurgent euro and a stable GBP. Prospects of an interest-rate hike as early as September by the Fed have also led to reversal of investment capital from emerging markets.

This is what I see happening with the USD/ZAR pair:

• A Fed interest-rate hike will accelerate the depreciation of emerging market currencies, including the South African Rand
• Ongoing weakness in the Chinese economy will further depress commodity prices owing to decreased demand
• The South African mining sector will continue to feel pressure in the form of lower revenues, and higher levels of unemployment
• Platinum and gold prices are at their lowest levels in 5 years, meaning that South Africa's chief mineral exports are imperilled
• The 0.4% decline for the year in manufacturing production figures has also hurt the currency
• The imminent release of the monthly/yearly mining production data for June is a low volatility announcement, and it will not reverse the performance of the South African Rand

President Jacob Zuma expects economic growth of 3% between 2016 and 2018, owing to improvements in the energy sector. If these facts and figures hold true, the economy will slowly begin to turn the corner and investor confidence will be restored. It is however a medium-term strategy which means that high levels of capital investment will be needed to facilitate the infrastructure development.

Global Perspective on Currency Markets

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US Dollar Index August 2015

It should be remembered that the South African Rand is not alone in its downtrend. Even developed country currencies such as the Canadian dollar and Australian dollar are feeling the pinch. The Australian economy is a mix of an emerging market economy and a developed economy, since a huge portion of the GDP is derived from the mining sector. With depressed commodity prices, it makes sense that the Australian economy is reeling. The overall declines in purchasing power of major Asian countries like China is bad for business for Australia and South Africa. On the upside, many economists are seeing signs of a reversal in USD gains coming as early as 2016. If the Fed raises interest rates, the equities markets will suffer, as investments flow into Treasury notes, interest-bearing accounts and the like. As far as the Euro is concerned, much of the risk has already been factored into the currency, vis-a-vis the Greek crisis, quantitative easing and ongoing global weakness.