Traders around the world took note of emerging markets in 2018, especially emerging forex pairs. From impressive heights for some emerging currencies in spring to the summer’s slump, forex exotics were highly volatile. Many people profited from the rapid and sometimes predictable movements. In turn, many traders see the South African rand as the standard bearer for emerging currencies. Trading the rand has become increasingly popular among forex traders around the world this year as well as in 2018.
Hit hard in the middle of last year by the global turmoil in emerging markets, ZAR made quite a comeback as risk sentiment improved. Other factors included stock markets’ correction and ongoing rate differentials. However, many traders didn’t profit from the rand’s recovery. They wondered how others knew that Africa’s second-biggest economy wouldn’t stay in recession for long. Through this case study we’re going to look in context at some of the considerations an experienced trader might remember before making a trade.
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What pushed the rand down?
Looking back to the start of 2018, ZAR had already been hit hard by South Africa’s trade account deficit and problems in the mining industry, reaching 14.58 to the dollar in November 2017.
News came thick and fast in early 2018 of potential land grabs by the government against white farmers, more scandals engulfing then-president Jacob Zuma and growing state debt, but there wasn’t much response by the South African currency. In fact, strong GDP data at the beginning of the year shored up the rand and actually led to a degree of recovery up to March.
Summer 2018: recession and crisis for ZAR?
June’s GDP data from South Africa shocked many rand traders and marked the start of a recession in the country: although it took time, the rand reacted accordingly.
For almost any major currency like the euro, dollar, yen or pound, it’d be nearly guaranteed that a GDP release missing the previous figure by over 5% would cause a sharp drop immediately. This didn’t happen for the rand in June mainly because of the critical role of sentiment for ZAR.
Brazil, India, Indonesia, Turkey and South Africa are often nicknamed the ‘fragile five’ in financial media for their high vulnerability to outflows of capital. This is exactly what caused the delayed reaction to GDP data and crisis in emerging markets in late August and early September 2018.
Sentiment and data together are key for trading the rand
Foreign investors in a country are often slow to move their capital out due to the nature of many investments. Non-liquid assets in South Africa such as property and some deliverable shares took time to sell, but once the trickle began, it was only a matter of time before it became a widespread outflow.
This was clear even before September’s GDP growth release from South Africa, which confirmed the country’s official entry into a recession. For a time, investors continued to flee to the booming American equity market and to other apparently more stable instruments.
Stock market correction, better data and a recovering rand
The slump in shares over the past few months made many people rethink their strategies. If the yield from equities was decreasing amid higher interest rates in the USA and ongoing effects of trade wars, why not go back to trading the rand?
The rand’s recovery began even before the crucial GDP data last week that showed a return to growth. The driver again was sentiment as investors sought out higher yields despite the events of the summer in emerging markets. Where investors in deliverables went, many forex traders immediately followed.
Context and sentiment are as important as data
2018 was even more volatile than usual for the rand. Volatility can be a big risk for any trader. However, it’s clear that many traders using sentimental combined with fundamental analysis made considerable gains from ZAR’s movements last year. There’s no reason you can’t do it too.
When trading the rand or most other emerging currencies, there are three key questions that traders need to ask themselves:
- How does the yield compare with other financial instruments, especially shares?
- What’s going on in other emerging markets?
- Does the most important data like GDP align with overall sentiment?
The first steps before trading the rand are answering these questions and applying a sound strategy to manage risk. These done, a trader’s ready to face and even potentially benefit from a rollercoaster year like 2018 was for ZAR.
Sign up with Exness today to trade the rand! ZAR can be traded against 9 different global currencies with spreads from 1.8 pips.