As we have shown last time, there is no a worldwide fair exchange market. In fact, the international Monetary System is made up by a limited number of a couple key floating currencies that flow between themselves. In fact, any currency can officially be converted to another one based on the parity of purchasing power concept. In the reality, since we forgave the Gold Exchange Standard[i] in 1971, we have mainly three monetary areas symbolized by the dollar USD, the Euro and the Russian ruble (as of 01/01/1999, 26 domestic currencies were attached to USD, 14 to EURO and 9 to Ruble). We properly call this currencies panels. By the way, international institutions like IMF or FIDA have their own currency[ii].
Since work as a team is more efficient than struggling alone, South African monetary authorities decided to link the rand to USD few decades ago and aligned with the rest of advanced economies by choosing the IFRS (International Financial Reporting Standards) as local GAAP for reporting purposes.
As you know, when a country decides to link its currency to another one, whatever the way this is done, it deliberately decides to sacrify a portion of it`s monetary power… So, when a strong USD dollar is rarefied in such as economy, it`s value has to be adjusted for competition purposes on Foreign markets. I believe, struggling to maintain a strong rand is difficult from now. The south African Financial market is maybe more sophisticated for it`s real economy, even though the GDP overcomes 300 billion USD. In such as situations, be competitive is more important than having a strong domestic currency compared to others.
The second paradox is that inside South Africa, you have at least one administrative area which rejected to adopt the domestic currency. They have their own currency and ZAR is not accepted in such us cities. So, instead of facilitating the free circulation of the national currency, they store it in a kind of reserves and impact indirectly it`s value on the informal market. The inflation should be also studied (for your information, in march 2016, PPI was 7.1 and CPI 6.3, refer to www.resbank.co.za for more details )…
In Kuwait which also adopted IFRS as local GAAP, we are in another world. In fact, that country has the most of its foreign commerce with India and other couple of countries and decided deliberately to limit the impact of USD through the oil market on its domestic currency. That`s why most of other currencies are converted to this dinar through the crossed currencies mechanism by using USD or the Indian rupee as referee. (for instance, you need at least 1900 XAF or CFA to buy only 1 Kuwaiti dinar)….
Hope this will help to clarify the issue raised last time when we presented the new Zimbabwean monetary policy.
Let`s go back now in 1971, the year related to the abandon of the Gold Exchange Standard. Everybody knows that the change happened in the oil market was behind a systemic crisis which collapsed the financial system… So, you maybe ask yourself, which events triggered the first oil shock and why the oil market is so atypical? We`ll talk about this next time.
[i] For your information, Gold Exchange Standard was the international monetary system which governs the world since Bretton Woods Agreements, just 1 year before the end of World War II (1944) to 1971. Based on that system, all domestic currencies values were convertible to USD based on a respective fixed rate. So, during that period, we never knew a high or a lower dollar outside USA since 35 dollars were fixed to 1 gold ounce, I believe it was safe since gold reserves underground would certainly reach their peak after the peak oil ).
[ii] For more information about this, you can visit the official IMF website (www.imf.org)