South African Rand: Difficult Times Ahead?
The South African rand is one of the currencies you might not often hear about. This is logical as the South African rand isn’t as famous as its larger counterparts such as the US dollar and the British pound. However, some forex traders tend to include it in their trading portfolios, trying to take advantage of its value fluctuations.
This blog aims to give you valuable insights regarding the South African rand and the South African economy that you may want to consider when doing your market research.
Learn the South African Rand fundamentals
The South African Rand is the official currency of the Southern African Common Monetary Area which includes South Africa, Namibia, Lesotho and Eswatini. Rand is the Dutch and Afrikaans word for “ridge”. If you wonder what a ridge has to do with the rand, you probably don’t know that the largest deposits of gold in South Africa were found in a ridge upon which the city of Johannesburg was built.
The South African Rand was introduced in 1961. For the next 25 years, South Africa’s currency suffered from the consequences of an economy tormented by high inflation figures and severe international economic sanctions. In mid-1985 the government was even forced to suspend forex trading for some days to stop its rapid depreciation.
Strengthening against major currencies isn’t easy for the South African Rand as high inflation, budget deficits and a problematic energy supply weigh on the economy. However, South Africa is regarded as an emerging market economy that presents investment opportunities. A World Bank report said that South Africa has managed to regain most of the lost, due to the coronavirus pandemic, GDP. In the last couple of years, authorities have turned to renewable energy investments announcing new attractive incentives.
South African economy: Mining industry is one of its pillars
The South African economy is the third largest in Africa after Nigeria and Egypt. South Africa’s economy is the most industrialised in the continent. South Africa is well-known for its rapidly growing mining industry.
A survey published by the Boston Consulting Group noted that the country’s mining industry contributes 8% of GDP and provides direct employment to almost 500,000 people.
Another report by the Witwatersrand University in Johannesburg said that “South Africa possesses ore reserves amounting to a value of more than US$2.5 trillion, with 16 commodities ranked in the Top 10 internationally. South Africa has the largest reserves of Platinum-group metals (PGMs; 88%), Manganese (80%), Chromite (72%) and Gold (13%) known reserves in the world. It is ranked second in Titanium minerals (10%), Zirconium (25%), Vanadium (32%), Vermiculite (40%) and Fluorspar (17%).”
South Africa Reserve Bank tightens policy, Rand weakens
The South Africa Reserve Bank (SARB) has hiked its interest rates many times in the past 18 months, tracking moves by major central banks in an effort to stabilize inflation. Headline consumer inflation slowed to 6,8%, on a yearly basis, in April from 7,1% in March. According to the report, published by Statistics South Africa, April’s figure was an 11-month low.
SARB delivers one more interest rate hike on May 25th
On May 25th the SARB’s Monetary Policy Committee raised borrowing costs by 50 basis points, surpassing expectations for a 25 basis points rate hike. Interest rates have reached the highest level since April 2009.
In its post-meeting statement, the SARB’s governing board said that “headline inflation is forecast to remain above the upper end of the inflation target range until the third quarter of this year, and will only sustainably revert to the mid-point of the target range by the second quarter of 2025.”
The SARB’s policymakers forecast GDP growth for 2024 and 2025 to come in at 1.0% and 1.1% respectively. For this year, the board still sees a 0.3% GDP growth rate.
Does the South African Rand get a vote of confidence from analysts?
The South African rand dropped on May 10th, hitting a three-year low against the US dollar, while international and domestic government bonds also fell. Investors and traders felt uncertain as fears of scheduled blackouts (known as load shedding) grew with the winter setting in in the southern hemisphere.
Commerzbank’s analysts suggest that the South African rand could continue to suffer despite the aggressive monetary policy implemented by the SARB. “The rand is suffering in a risk-averse environment, currently dominated by the US debt debate, and from persistent home-grown problems. The list of those is long and includes the energy crisis, a poor growth outlook and high unemployment as well as questionable foreign policy decisions. This is the government’s responsibility,” they note in their report.
Goldman Sachs emerging markets experts wrote in a report regarding the South African economy that “concerns around more load-shedding and the impact on what is already an anaemic growth outlook have increased. And with inflation still high and surprising to the upside even with low growth, the SARB faces a tough trade-off to manage, and so may be more constrained in delivering rate hikes to anchor expectations and support the carry in a sharply depreciating currency.”
Trading the South African Rand for beginners
The South African rand is one of the most traded currencies in the African continent. Currency pairs such as the rand against the US dollar or the rand against the British pound are included in portfolios of traders that want to take advantage of the rand’s fluctuations. Nevertheless, currency trading involves risks for all traders, whether beginners or experienced.
One way to reduce your trading risk is to upgrade your trading knowledge. Trading is not all about speed, instinct and thorough knowledge of the market. Your funds are at risk the moment you start trading. However, risk management tools are at your disposal, and you should be able to use them when necessary.
How can you learn to use them? It is simple since many forex brokers offer comprehensive educational materials including forex trading courses, forex webinars and seminars, e-books and other such helpful content. Take the opportunity to learn the trading fundamentals and minimise your stress and anxiety while enjoying your trading experience.
Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with expert traders. Watch and learn from live trading sessions.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.