How can we try to understand the Rand’s price relative to other currencies through an explanation of the Purchasing Power Parity model (PPP)

Insights from JP du Plessis, Methodical Asset Management

(Adapted for the Wealth & Asset Advisors’ client newsletter February 2026)

The South African rand (ZAR) is known for its volatility, sometimes strengthening sharply, often weakening unexpectedly, and frequently reacting to global events that appear far removed from daily life in South Africa.
To help make sense of these movements, Purchasing Power Parity (PPP) remains one of the most useful long‑term tools for understanding where the rand “should” be trading versus where it actually is.

Below, we unpack how PPP works and what it currently tells us about the rand, drawing on an excellent analysis by JP du Plessis of Methodical Asset Management.

What PPP Actually Measures

PPP compares long‑term inflation trends between countries to determine how their currencies should move relative to one another.

• If South Africa’s inflation is higher than that of the U.S., the rand should depreciate over time.
• Conversely, if inflation were lower (which historically hasn’t been the case), the rand would be expected to strengthen.

In JP’s model, a geometrically weighted approach is used meaning older data points matter less than recent ones. This makes the PPP estimate more robust and responsive to modern economic conditions.

Why PPP Is Useful — But Not Perfect

PPP is excellent at showing long‑term fair value, but it doesn’t capture short‑term forces such as:

• global risk sentiment,
• capital inflows/outflows,
• political shocks, and
• commodity cycles.

These factors often cause the rand to deviate sharply from its fair value for extended periods.

What the Last 20 Years Tell Us About the Rand

JP highlights several key periods where the rand diverged meaningfully from PPP fair value:

Periods of Undervaluation (Rand Weaker Than PPP Suggests)

1. 2015–2016:
   • Chinese slowdown fears
   • End of the commodity super-cycle
   • “Nenegate” firing of Finance Minister Nhlanhla Nene
     Result: Rand spiked to R16–R17, despite PPP near R12.
2. 2020 COVID Shock:
   • Panic-driven sell‑off
   • ZAR briefly overshot toward R19.
3. 2022 Dollar Strength + SA Domestic Weakness:
   • U.S. Federal Reserve accelerated rate hikes
   • South Africa faced its most severe load‑shedding cycle
   • Weakening current account
     Result: Rand weakened sharply while PPP still suggested R14–R15.

Why does this happen?
The rand is one of the world’s most liquid emerging-market currencies and is often used as a proxy for global Emerging Market sentiment. In times of fear, investors sell rands even when local fundamentals don’t justify it.

Periods of Overvaluation (Rand Stronger Than PPP)

Less common, but notable examples include:

• 2005–2007: Strong commodity boom and a rare South African current account surplus.
• Early 2021–2022: Post-COVID commodity rally (particularly platinum group metals) briefly lifted the rand near or slightly through fair value.

A Rare Moment: Rand Trading Near Fair Value

According to the PPP model, the current fair value is approximately R16.30 per USD.
Unusually, the rand has recently been trading close to this figure.

Several factors explain the convergence:

• Formation of the Government of National Unity (2024) reduced political risk through dilution of ANC ideology.
• Load‑shedding improvements relative to 2022–23.
• Global dollar softness after an extended period of U.S. strength.
• Rising commodity prices (gold, platinum, coal).
• The rand has gradually “grown into” its PPP value as inflation differentials accumulated.

What This Means for Investors

PPP is not a timing tool — it cannot predict short‑term moves but it does serve as a powerful anchor for judging whether the rand is:

• exceptionally cheap (often when fear dominates),
• unusually strong, or
• somewhere near fair value.

Right now, the rand being close to fair value is uncommon in historical context.
However, many underlying structural risks remain, meaning:

Over the long term, the balance of risks still leans toward gradual rand weakness — consistent with inflation differentials and South Africa’s economic vulnerabilities.

Final Thoughts

JP du Plessis’s analysis provides an excellent framework for understanding the rand’s behaviour. For investors, the key takeaway is not to react emotionally to currency swings but to recognise where the rand sits relative to long-term fundamentals.

For portfolio planning, maintaining offshore exposure remains a vital long-term component, not only for market return diversification, but also to hedge against the rand’s long-run weakening bias.