Forex Trading Guide for USD/ZAR - Tips & Strategies

Instrument description

The exchange rate of the United States Dollar in relation to the South African Rand is given by USD/ZAR, where USD is the base currency, and ZAR is the quote currency. The USD is recognized as the most traded currency in the world, while ZAR represents an emerging economy of South Africa.

The symbol 'ZAR' is unique coding for South Africa as most of the currencies are coded with two initials from the country, and the third initial is the name of the currency, for example, GBP where 'G.B.' stands for Great Britain and 'P' is for Pound. In the ZAR, the 'Z.A.' stands for 'Zuid-Afrika' which is the Dutch name for South Africa, and 'R' stands for Rand. The word Rand comes from the Afrikaans word 'Witwatersrand, which means 'white waters ridge,' and the ridge is located in Johannesburg and contains most of the gold deposits.

The USD/ZAR pair means how many Rand will be needed to buy one U.S Dollar. For example, if the current quote of USD/ZAR is 17.28, it shows 1 USD equals 17.28 Rand; in other words, a trader would need to pay 17.28 ZAR to buy 1 USD. The USD/ZAR pair is considered a minor pair in the Forex market, but the pair is starting to be recognized in major Forex exchanges.

History of USD/ZAR Currency Pair

The U.S economy is recognized as the largest economy in the world, and USD is not only the most traded currency but also the world's leading reserve currency. The trade and service sector accounts for nearly 80% of the economy, while the industry sector is almost 20%. According to statistics, the Gross Domestic Product (GDP) of the U.S was 23% of the entire GDP of the world.

The country of South Africa is considered to be one of the most developed and economically stable country in all the 54 countries in the continent of Africa. The country has a mixed culture with ancient Zulu roots along with British and Dutch traditions. South Africa is filled with natural resources, particularly diamonds, gold, coal, ore, and other minerals, which contribute to a major chunk of the country's income. The main trading partners of South Africa include the U.S, China, Japan, and the European Union (E.U).

The ZAR was introduced in 1961, and before the Republic of South Africa was established. The Rand replaced the South African Pound, and in the early 1970s, the Rand was equal to 1.5 U.S Dollars, but over the decades, the value of Rand depreciated considerably. In the 1990s, the international political landscape saw drastic changes, and Rand witnessed record low levels. The ZAR is also considered a legal tender of neighboring countries Namibia, Swaziland, and Lesotho. Today, the value of Rand is correlated to the price of gold.

Being a commodity-based currency, the value of the South African Rand depends on the global prices of gold and other raw materials. South Africa is a leader when it comes to the export of diamonds and gold, and the economy directly depends on the extraction of valuable metals, gemstones, and minerals. According to statistics, the growth rate of South Africa, and the value of Rand depends on the increase in the demand for gold. On the other, most of the commodities such as oil and gold are priced in U.S Dollars, and any changes in the value of USD impacts the global prices of oil and gold. If the quotes of oil and gold increases, then the value of U.S Dollar declines.

The United States and South Africa share a healthy trade relationship with South Africa importing 0.33% of total exports of the U.S, while the U.S imports almost 8% of South Africa's total exports. The major component of U.S exports to South Africa includes vehicles and machinery, while the major component of South Africa's export to the U.S includes precious gemstones, metals, chromium, and coins.

How to Trade USD/ZAR Pair

The USD/ZAR pair is not as widely traded as some of the other currency pairs, but the USD/ZAR pair is called an exotic pair due to large spreads and low trading volume. The USD/ZAR pair is a pair that can be traded for its high volatility, and traders can make use of sudden and unpredictable changes in the market. However, traders and investors should perform both fundamental and technical analysis in order to increase the possibility of profit for short and medium trade. The USD/ZAR is traded 24/7 from Monday to Thursday, but the time when the market is most active is from 20:00 to 5:00 GMT.

The ZAR usually has high-interest rates, which makes it an ideal currency for performing a carry tradeand among others, a popular form of trading USD/ZAR pair is through Contract for Difference (CFDs), which is also a common option among short term traders. Trading CFDs allows traders to speculate on the price movement of the underlying asset without having to own the currency. Traders can use leverage to gain a larger exposure to the market and have the potential to maximize their profits, but there is also equal risk of high losses if the market does not move in the direction as speculated by a trader. So a risk management strategy may be implemented.

With CFDs, the trader can also Buy (go Long) or Sell (go Short). If the trader believes that the USD will gain strength as compared to ZAR, then he would go long or Buy. Conversely, if the trader thinks that the USD will decline and ZAR will rise in value, then he would go short or Sell.

How to read the Price Change in USD/ZAR Pair

The value of the USD/ZAR pair depends heavily on the correlation of economies of the USA and South Africa. The USD/ZAR pair is often seen behaving erratically in the Forex market as the economies of both the U.S and South Africa are influenced by many domestic and global financial factors. However, the USD/ZAR pair can sometimes be quite volatile and move a staggering 2500 points in a day, which is significantly more than even the major currency pairs. The US/ZAR pair is hard to predict, which means an experienced trader could use the sudden volatility to try to gain profits in a short span of time.

If we look at the price charts of the USD/ZAR pair, we see that value remained with the range of 14.00 to 15.50 from mid-September 2019 to March 2020. The highest value of the USD/ZAR pair was recorded 19.039 on April 3, 2020, and the lowest value of 16.496 on June 10, 2020. Currently, USD/ZAR pair trades on 17.284. The Bid price is 17.289, while the Asked price is 17.271.

If the USD/ZAR rate rises, it means that USD has increased in value relative to ZAR, and if the exchange rate of USD/ZAR declines, it means that the USD has lost its value as compared to the ZAR. If we examine the historical value of the USD/ZAR for the last five years, we notice that the pair reached a high value of 17.7659 in January 2016 and a low value of 11.5047 in February 2018.

What causes price change in USD/ZAR pair?

The exchange rate of USD/ZAR is determined by central banks of both the USA and South Africa, which are the U.S Federal Reserve, also known as the Fed and South African Reserve Bank (SARB). Both the banks release monthly reports and monetary policies that allow traders to determine the volatility and market direction of the USD/ZAR pair. The fundamental factors that impact the USD/ZAR pair are

• Interest rates
• Inflation
• Gross Domestic Product (GDP)
• Consumer Price Index (CPI); and
• Unemployment rate

The global prices of gold and other raw materials must be taken into account when doing technical analysis of the USD/ZAR pair. But as the USD/ZAR is quite volatile, the traditional tools to predict the price movements and direction of the market are not conclusive. The traders need to keep themselves updated on the monetary policies, global economic news, and market sentiments to accurately spot the entry and exit points and speculate on the price changes.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.