Forex Trading In South Africa: Through The Looking Glass

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The South African economy certainly has its fair share of challenges. Volatility is an innate characteristic of the South African Rand (ZAR), helping to drive wild price fluctuations in cross-currency exchange rates. While the country boasts significant natural resources in the form of coal, gold, palladium, copper, iron ore, zinc, et al, weak global commodity prices have hamstrung economic growth and resulted in a sharp contraction. 

A combination of weak governance, nepotism, corruption, crime, and lack of integrity have accelerated declines in the performance of the South African economy.  The unemployment rate currently stands at around 27.3%, with a CPI of 5.3%, and foreign direct investment inflows of $1.3 billion. The 2019 Index of Economic Freedom ranked South Africa at #102 on the list, with an overall score of 58.3. Among the factors weighing heavily on the performance of the economy and South Africa’s global ranking are government integrity, judicial effectiveness, and property rights. 

The country scores well in terms of trade freedom, and monetary freedom. One of the most important measures of a country’s viability as an investment haven is its credit rating. However, on July 26, 2019, the credit rating agency Fitch assigned a BB + rating with a negative outlook for South Africa. 

The Performance of the South African Rand

At the time of writing (August 1, 2019), the South African Rand was trading at 14.1659 to the USD, snugly between the 52-week low of 13.1779 and the high of 15.6944. The 3-month performance of the USD/ZAR pair is -2.01%, while the year-to-date performance is -1.36%.  

The souring sentiment is reflective of broader macroeconomic issues in South Africa, and to a lesser degree developing economies in general. Over the past year, the USD/ZAR pair has appreciated to the tune of 7.05%, indicating a strong uptick in the purchasing power of the South African rand.

The current exchange rate indicates how many units of ZAR are required to purchase $1. An appreciation of the ZAR is indicated by a decrease in the number of rands required per unit USD. The South African rand has been legal tender in the country since 1961. Each rand is made up of 100 cents. 

From inception in 1961 through 1982, the South African Rand was stronger than the US dollar. Owing to international pressures on the South African government, the Rand started losing value against foreign currencies and ultimately agonized through decades of sharp declines.

The South African Reserve Bank (SARB) is the chief monetary authority in the country. South African banknotes prominently display the Big Five. South African banknotes include the following denominations: R10, R20, R50, R100, R200. Each note is crafted to meet specific technical requirements. 

All the notes are 70 mm high, but their lengths vary by 6 mm from one banknote to the next. For example, the R50 banknote is 70 mm high and 140 mm long, while the R100 banknote is 70 mm high and 146 mm long. South African banknotes have watermarks, see-through print, micro printing, unique numbering, and security threads.

The Popularity of the South African Rand

Forex experts at easyMarkets readily attest to the fact that the South African Rand remains one of the most heavily-traded currencies in the world. Thanks to its rampant volatility, traders enjoy speculating on the Rand’s price movements. This currency is seen as the poster child for emerging markets, and it reacts strongly to geopolitical sentiment. 

While statistics change, analysis clearly demonstrates that the Rand is a top 20 ‘most traded currency’ in the world. It is certainly one of the most-watched of the BRICS (Brazil, Russia, India, China, and South Africa) currencies. Trading volumes average around $4 billion daily with spot trades and total turnover reaching $17 billion +.

The rand is heavily influenced by what transpires in emerging market economies. South Africa is rife with liquidity, thanks to its well-established financial markets. While investors and traders dabble in currency trading, there is always a high degree of inflation risk and value propositions given these wild swings. 

The South African rand has earned the inauspicious title as one of the ‘fragile five’ currencies. IG ran an editorial extolling the virtues of volatility with currency pairs. The USD/ZAR pair ranked at #6 on the list of volatile pairs.

The South African rand is strongly influenced by the gold price, given that the South African economy relied heavily on goldmining for its foreign exchange reserves. Since gold is priced in USD, any decline in the gold price naturally results in fewer ZAR. The correlation between the gold price in USD and the South African rand are ironclad. 

When the price of gold increases, South Africa exports more gold and generates higher revenues in local currency. If the gold price falls, the costs of extracting the gold from the mines in South Africa must be weighed against the returns. Unfortunately, the cost of mining gold buried deep within the earth has increased to the point where it is now unprofitable and mines have shuttered across the country. 

What Other Factors Affect the South African Rand?

The South African Rand may otherwise have been hard hit in trading activity this month, were it not for the actions of the Federal Reserve Bank. In July, the Rand depreciated by approximately 1% against the USD. However, a Fed rate cut will limit the Rand’s losses as funds continue to flow into high-yield assets across-the-board.

On the plus side, the South African Rand benefited from its SA trade balance figures in June. These increased to 4.42 billion from 1.70 billion. As with many pyrrhic events, news of the Fed rate cut will be short lived. The ZAR/EUR exchange rate which is currently trading around R15.782 will likely decline in the weeks and months ahead. 

The financial performance of South Africa’s lead energy supplier Eskom, is going to impact the currency. The power supplier has failed to keep the lights on for businesses and households across the country. Widespread power outages, load shedding, and collapsing infrastructure has crippled the economy. A government bailout of Eskom and plans to nationalize healthcare will weigh on South Africa’s coffers and likely weaken the Rand further.

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