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September 22, 2020

Merit and Demerit of South African Rand (ZAR) pairs

What are the advantages and disadvantages of trading South African Rand (ZAR) pairs?

Merit-and-Demerit-of-South-African-Rand-(ZAR)-pairs Merit-and-Demerit-of-South-African-Rand-(ZAR)-pairs

Trading South African Rand (ZAR) pairs

Among the high-interest rate currencies that are popular in Forex these days, South African Rand is popular among traders as a currency with high-interest rates.

However, some people may not know what kind of currency pair South African Rand is.

The South African Rand was once known as a high-interest rate currency like Australian dollars and New Zealand dollars, and interest rates are still high, but not as high as they used to be.

Therefore, focusing solely on interest rates may be less attractive in terms of swap points than currencies such as the Turkish lira and the Mexican peso.

In addition, South Africa’s local currency bond rating was “BBB minus”, but it was lowered to “BB plus” in November 2017, and it can not be said that the risk as an investment product is lower.

However, South Africa is Africa’s largest economy, and it is politically stable compared to other African countries.

Of course, it is not without anxiety, but it is a country where future growth can be expected.

In this article, we will introduce the situation of South Africa and what kind of currency South African rand is.

Learn about the characteristics of the South African Rand, not just about the high-interest rates, and make use of it in Forex trading.

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About South African Rand

South African rand may be a currency pair that many traders are not familiar with, but it is an attractive currency for Forex trading.

Here, we will introduce South Africa and South African Rand.

Located at the southernmost tip of the African continent, South Africa is known as the host country for the 2010 World Cup.

The former British territory was criticized for adopting a racial segregation policy called apartheid.

Although apartheid was abolished in 1994, the problem of wide racial unemployment disparities has been lingering for some time due to educational disparities.

However, at present, the unemployment rate gap between races is narrowing, and the wealthy black people called black diamonds are emerging, making it one of the countries where future economic growth is expected.

Therefore, South Africa is one of the emerging countries with economic growth expected called BRICS, along with Brazil, Russia, China and India.

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South Africa’s Economy

South Africa is Africa’s largest economy, accounting for about 40% of the GDP of African countries south of the Sahara Desert.

Chromite, manganese, and platinum are also resource-rich countries, boasting the largest production in the world, and the world’s largest reserves of gold and platinum.

From 2004 to 2007, South Africa continued to experience high economic growth of 4.6% to 5.6% each year, driven by the country’s strong consumer spending.

With the rise in resource prices as a tailwind, employment and income improved, the land price rose at that time, and the wealth effect of stock prices also contributed to growth in personal consumption and the expansion of the economy.

In addition, low-interest rates from 2003 to 2006 and active lending to low-income earners by private banks are also believed to have boosted personal consumption growth.

After that, due to the impact of the Lehman shock, the country’s growth rate fell to -1.54% in 2009, but recovered to just over 3% in 2010.

However, the economic growth rate from 2012 to the present has been sluggish.

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South Africa’s History and Interest Rate

The country’s economic growth rate has been sluggish since 2012 due to the slowdown in personal consumption due to stagnation of employment, the frequent occurrence of mine strikes and the resulting decline in investment, and the economic downturn in Europe.

In addition, the South African rand fell against the dollar, partly due to the effects of shrinking US monetary easing.

In response, the South African Reserve Bank, which was concerned about rising prices, raised interest rates in 2014.

Inflation occurred in 2016 due to a poor harvest of corn, the country’s staple food, and the South African Reserve Bank raised rates again amid a slowdown in the domestic economy.

This has led to a tail, and personal consumption is still at a low level.

Although the country continues to have a budget deficit, it has remained unwilling to follow populist policies, including former President Thabo Mbeki, whose term expired in 2009.

Mr. Mbeki strengthened relations with Western countries and actively promoted deregulation, but Mr. Zuma, who became president after that, deepened relations with China and promoted a state-led market economy.

While the economy initially grew steadily, South Africa has widened its economic disparity since the Zuma administration as the Gini coefficient, which measures income distribution inequality, has risen.

The criticism of Mr. Zuma was further heightened by the unwinding of the dollar due to the rise in US interest rates and the fall in resource prices.

In addition, Mr. Zuma immediately withdrew after announcing that he would replace Finance Minister Nene, who was highly trusted by the market and was working on fiscal consolidation, with Mr. Ban Ruen, an unknown member of parliament.

It caused political turmoil, including the appointment of Mr. Gordan.

As a result, Mr. Zuma was forced to resign in February 2018.

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South Africa’s current situation

The current President of South Africa is Cyril Ramaphosa.

President Cyril Ramaphosa has set out a fiscal consolidation plan in the new year’s budget.

In addition, the cabinet was reshuffled to return two former finance ministers who promoted fiscal reform to ministers, such as returning Mr. Nene to the minister of finance and appointing Mr. Gordan as the minister of public enterprise.

This has raised expectations that the stagnant South African economy will begin to grow again.

However, it seems that it is not smooth sailing at the moment.

Interior Minister Gigaba, who was one of the ministers and was the Minister of Finance under the Zuma administration, was sentenced by the Supreme Court to violate the Constitution.

It is expected that the Ramaphosa administration will be forced to steer in the future, as it is expected that the issue of over employment will be started in earnest and the personnel reduction will not proceed smoothly in the future.

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Charateristics of South African Rand

As already written, South Africa is a resource-rich country.

Therefore, it is believed that there is a correlation between resources such as gold and platinum and the movement of South African Rand.

However, the correlation is not so high when it comes to gold.

If anything, it can be said that platinum has a higher correlation.

This is because the country’s platinum production is the highest in the world, accounting for 70% of the production.

South African rand is an emerging market currency and a resource country currency.

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Correlation of Oil Market and South African Rand

Emerging market currencies and resource-rich countries’ currencies tend to be influenced by crude oil price movements because crude oil is bought in dollars.

As mentioned earlier, crude oil is bought and sold in dollars, so if you buy crude oil, you sell dollars to buy crude oil, and vice versa, you sell crude oil and buy dollars.

Therefore, if the price of crude oil rises, the dollar will fall, and if the price of crude oil falls, the dollar will rise.

If the dollar falls, it is risk-on and the dollar is sold, and emerging market currencies and resource currency are bought.

Then, if the dollar rises, it will return to the dollar, and there will be a movement to sell emerging market currencies and resource country currencies and buy the dollar.

For this reason, the South African rand is also susceptible to crude oil price trends.

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South African Rand and VIX index

The South African rand has also been pointed out to be related to the VIX index.

The VIX Index is the “Volatility Index”, which is an index calculated by the Chicago Board Options Exchange based on the price movements of options trading for the “S&P 500”, which is the major stock price index in the United States.

The VIX index is known as an index that expresses the fear of investors, and when this number is high, investors have a negative outlook for the future.

On the other hand, higher numbers mean investors have a positive outlook for the future.

As mentioned earlier, the VIX index is calculated based on the price movements of options trading, but options and futures tend to move ahead of the stock market.

For example, when the Nikkei 225 futures and Nikkei 225 options rise, the Nikkei average also rises, and when the Nikkei 225 futures and Nikkei 225 options fall, the Nikkei average tends to fall.

Since the South African rand is an emerging market currency, it tends to sell and fall when the VIX index rises and buy back when the VIX index falls.

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South African Rand has low market volume

The South African rand is a currency with much less trading volume than the US dollar, Euro, and Japanese yen.

In addition, because it is an emerging market currency, it is not uncommon for it to be sold significantly and fall sharply in the event of a global economic crisis or war, unlike the escape currencies such as the US dollar, Japanese yen, and Swiss franc.

The reason for such a plunge is that investors who had a strong risk-on stance until then withdrew their funds from risk assets in the wake of the economic crisis and switched to investing in risk-off assets such as the US dollar and Japanese yen.

As a result, the South African rand will fall, but due to the low trading volume, the rate of decline tends to be large.

South African rand’s price is highly volatile due to low trading volumes and tend to be sensitive to the global economy.

Therefore, during a global recession or boom, it may move rapidly in a certain direction.

However, it often stays in the range once it has gone up or down extremely.

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What to be careful with South African Rand?

One thing to keep in mind when trading South African rands is the volatile price movements due to low liquidity.

Since the South African rand is an emerging market currency, the volume of transactions is overwhelmingly small compared to major currencies such as the US dollar, Euro and Japanese yen, and semi-major currencies such as the British pound and Australian dollar.

According to the Bank for International Settlements, the South African Rand / Japanese Yen trade volume on April 1, 2016 was the 14th overall, with a share of 0.06% of the total.

For currency pairs with South African rands other than the cross yen, such as the South African rand dollar, the transaction volume is low because it is below this.

The transaction volume at this time is 3 billion US dollars.

The highest trading volume of EUR/USD is $1.173 trillion, and the next highest trading volume is $902 billion, indicating the low trading volume of the South African Rand.

As you can see, the South African Rand is an illiquid currency pair, so it tends to fluctuate both when it rises and when it falls.

Since the trading volume is small, the number of participants is small, and it may move irregularly, and it is undeniable that you will suffer unexpected losses due to market fluctuations, so you must trade with great attention.

In addition, the South African Reserve Bank’s basically no intervention in the foreign exchange market also contributes to the increased volatility of South African Rand.

As a result, the South African rand is a currency pair that is not easy for beginners to trade and is a bit difficult to trade.

Also, note that the currency pairs involving the South African rand are more susceptible to the movements of other major currencies such as the US dollar than the movements of South Africa alone.

In particular, FX Traders tend to hold South African rands following the Australian dollar and Turkish lira for the purpose of earning swap points, so there are many cases where they will suffer unrealized losses due to the plunge.

Many Forex beginners want to hold a currency like a funded investment or a foreign currency deposit due to the high yield, and open an account, but the biggest disadvantage of long-term holding is to withstand such a collapse.

It means that it will not be cut and will be a stop out on the way.

Therefore, if you are thinking of owning South African Rand, we recommend that you keep the leverage lower.

In case you are using an Islamic Swap-Free account, then such swap points won’t be included in the trading.

Trade ZAR currency pairs

Tips to trade South African Rand

One of the benefits of trading South African Rand is the country’s high policy rate.

If you combine the currency pair of the country with the currency of a country with the same policy interest rate, you may not feel much benefit, but if you combine it with a currency with an ultra-low interest rate like Japan, the swap point will be a lot.

South Africa’s policy rate for 2020 is 6.5%.

You can see that South Africa’s policy rate is higher than Japan’s policy rate of 0.1%.

There was a time when South Africa’s policy rate was as high as 12%.

South Africa had a high-interest rate policy to attract foreign investment, but the policy interest rate was lowered as an economic measure for the Lehman shock.

After that, it has been gradually raised due to price control measures.

Inflation targeting has been set in the country since February 2000, with the goal of keeping the consumer price index in the range of 3% to 6%.

Since the Ramaphosa administration, market expectations for the current administration’s economic measures have increased due to cabinet reshuffles, etc., but the future business situation in South Africa remains uncertain, and the outlook of world’s bank for international commodity prices is that of the country.

Prices of minerals and precious metals, which are major export items, are expected to decline.

The IMF also estimates that the country’s GDP growth rate for 2020 will be + 0.9%.

From this, it is expected that low growth will continue in the future.

With this in mind, it is unlikely that the country’s policy rate will return to its highest level at this stage.

In addition, the South African rand rate is very cheap, and the South African rand’s exchange rate is about 8 to 9 cents.

When trading in units of 10,000 currencies, the required margin amount is about 800 to 900 USD even if it is not leveraged.

If you multiply this by 100 times the leverage, the margin amount will be 8 to 9 USD.

Therefore, it is a very attractive currency for those who want to trade for a small amount.

However, please note that some Forex companies start from at least 100,000 currencies for the trading of South African Rand.

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How to follow the trend of South African rand?

There are economic indicators to look out for when trading South African rands, which are:

  • Consumer price index
  • GDP
  • Producer price index
  • Trade balance
  • SARB (South African Reserve Bank) policy rate
  • Unemployment rate

South Africa is currently suffering from sluggish consumption.

Therefore, the consumer price index is important as an index to measure the business conditions of the country.

Also, as mentioned earlier, South Africa aims to keep the consumer price index in the range of 3% to 6%, so we need to see what the results were against that target.

Gross domestic product (GDP) is expected to grow at a low rate as well, but we need to be aware of this trend.

It will be interesting to see if the South African Reserve Bank’s policy rate will be further reduced in the future.

In addition, the country has a high unemployment rate, reaching the 25% range.

Since it is an emerging country, it is by far the highest number compared to developed countries.

South Africa’s unemployment rate is by far the highest among the major emerging economies such as the BRICS.

Therefore, it is necessary to pay attention to the trend of the unemployment rate in the country.

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