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USD/ZAR: a pretty pair

The USD/ZAR or the US Dollar and South African Rand is undoubtedly one of the most popular of the exotic currencies across the board.

According to the triennial survey from the Bank of International Settlements in 2013, as a country South Africa accounts for $27 billion of the daily forex turnover, or about 0.3%. However, the South African Rand accounts for over 1.1% or approximately $60 billion in daily currency trading with most of the transactions taking place outside of the country, mostly in the UK.

One of the main reasons for these high volumes outside the country was due to the forex trading restrictions applied to South African residents. The average fluctuation in the South African Rand is about 1000 pips, making it a very attractive exotic currency to trade.

Whether you are a trader or an investor dealing with the US Dollar or the South African Rand, it is best to understand the factors that influence the USD/ZAR exchange rate. and to make note of a few basics about the USD/ZAR exchange rate.

USDZAR_Exchange_Rate
US Dollar/South African Rand Historical Exchange Rate (Source: Tradingview.com)

The USD is the base currency and the ZAR is the quote currency, meaning that prices are quoted in South African Rand to 1 US Dollar. For example if you see a USDZAR price of 12.80, it simply refers to the value of 1 US Dollar, or simply put, 1 US Dollar would fetch 12.80 Rand.

Monetary Policies

The most interesting aspect of the USDZAR currency rate is the fact that it represents two very different economies. While the US Dollar represents the world's biggest economy and also the world's reserve currency, the South African Rand on the other hand represents an emerging market economy and the second largest economy in Africa.

One of the traits of an emerging economy is the fact that when the US monetary policy is loose or accommodative, the search for yield often results in institutional money flowing to emerging market economies where the returns are much higher via interest rates albeit at some risks. When interest rates in a country are lowered, off-shore investors will not want to send money there because they are offering a lower ROI / yield  on investment, hence the demand for that currency is less. 

Therefore, the US Dollar often tends to fall in value against the South African Rand during times when the monetary policies of both the countries are starkly diverging. The institutional money however tends to flow back to the US during periods of tighter monetary policy as the search for higher yield often results in the institutional money flowing back to the safe haven of US bonds.

 

Commodity Prices

The South African economy has a significant exposure in the commodity markets in terms of mining of various minerals and metals. These commodities are eventually traded in the US Dollar and tend to rise and fall as the supply demand dynamics tend to shift and also the value of the US Dollar. Traders need to keep an eye on the export sector, especially the mining sector in the South African economy as it generally employs a large workforce and thus any shifts in the balance could clearly foretell incoming economic shifts in the larger perspective. It is estimated that the South African mining sector contributes over 60% to the national GDP with 8 out of 10 individual exports being commodities. Pay particular attention to Platinum, Gold, Diamonds and Coal which form the majority of exports from the country.

Politics & Economy

Politics in South Africa play a major role in the currency’s exchange rate fluctuations as well as the economic indicators. Any political turbulance often tends to significantly devalue the currency against the US Dollar and the same goes with the economic indicators as well. Of particular importance is the jobs market, a number that is closely watched by currency traders. The current quarterly unemployment rate in South Africa stands at 25% and any shifts in the unemployment rate is often seen as a surge in volatility in the USDZAR currency pair. Other important economic indicators include inflation and GDP. At the same time, the US economic indicators are also equally important as they tend to play a role in the strength or weakness of the US Dollar.

USDZAR – An attractive pair to trade

The points above are some of the most important aspects that affect the exchange rate of the USD and the South African Rand.

Other factors such as market sentiment and the global market conditions also play a role. As a trader, the USDZAR no doubt offers quite a lot of trading opportunities, largely thanks to the volatility seen in this currency pair. Traders who are positioned on the long side of the ZAR will find it attractive due to the interest rate differentials where the South African Rand comes at an interest rate of 6% against the US Dollar’s current 0.25% interest rate. Traders should however bear in mind that the currency pair is volatile and improper money management could result in significant losses either due to a sudden surge in volatility or wider spreads during off market hours.

What do you look at before trading this pair?