How to Trade the South African Rand: Understanding the Rand

South Africa is Africa’s second-largest economy, the first being Nigeria.

The country may also play an interesting role if the current global trend of de-dollarisation plays out, given that such an event would assist developing nations by opening new economic opportunities and hence, how to trade the South African Rand.

Besides, it may also be a good idea to pay more attention to Africa and the most traded currency of the African continent - the South African Rand.

In this article, we will explore how to trade the South African Rand, the advantages and disadvantages, along with various potential scenarios which can be possible in regard to how to trade the South African Rand. 

What Is the South African Rand? 

‘Rand’ is the Dutch word for 'ridge'. The ridge being referred to here is the one upon which the South African city of Johannesburg was built.

South Africa’s gold deposits were also found in that area. Since gold is money, it seems logical that the South African currency is named the Rand. 

Three months after South Africa declared itself a republic in 1961, the Union of South Africa introduced the Rand as legal tender. The Rand replaced the South African pound. 

The symbol of the Rand is ZAR. At the time of Rand's introduction, it was worth $1.4 US dollars. Now, in January 2024, the USDZAR is trading around 18.5-19. So, it takes around 18.5-19 Rand to buy one US dollar. 

In order to understand how the Rand got to an (approximate) exchange rate of 19 vs the US dollar, it is important to understand the South African economy.

After all, the health of the economy plays a significant role in the strength or the weakness of a country’s currency. 

The South African Economy 

While the South African economy may be the second largest in Africa, it is the most industrialized and technologically advanced on the continent. It is classified as an upper-middle-income country, one of only eight in Africa. 

Mining is a key contributor to the GDP of South Africa. The country is the world’s largest producer of platinum, chromium, and manganese. It is the world’s second-largest producer of titanium and a major gold producer as well. 

So, Africa’s economy is significantly impacted by the commodity markets. The past years have been tough for South Africa and this may continue, as it is projected by Deloitte that gross debt is expected to rise from R4.8 trillion in 2023-2024 to R5.2 trillion in 2024-2025.

There are also problems related to energy supply and inflation. Unemployment and increasing crime are also near-term issues facing South Africa. 

You can learn about trading, markets, and the macro environment by attending our webinars.

Click the banner below to register for a free webinar today: 

The South African Central Bank and Rand’s Evolution 

The South African Reserve Bank (SARB) is the foremost monetary authority of South Africa. It was modelled on the Bank of England. The SARB has more than 800 shareholders.

Every shareholder’s holding is below 1%. The SARB’s responsibility is to maintain the price stability of the Rand and intervene in the forex markets whenever needed. 

As per a 1974 agreement (known as the Rand Monetary Agreement or RMA), Swaziland, Lesotho, and Botswana were allowed to issue their own currencies. Before the agreement, the South African currency used to circulate in these nations.

However, for a few years, the South African currency circulated alongside those nations’ national currencies. 

Even today, multiple African countries have pegged their currencies to the Rand.

The Rand has behaved like an emerging market currency during major crises. As South Africa is a major exporter of gold, the Rand tends to be correlated to the price of gold. 

However, since the 9/11 attack in the United States, the Global Financial Crisis, and the pandemic, the Rand dropped as uncertainties made investors shift to safe haven currencies. 

If you’d like to explore how to trade the South African Rand, you can do so by registering a free demo account with Admirals; this gives you the option to practice trading with virtual currency without risking your actual capital.

Click the banner below to get started with a free demo account today: 

Trading the US Dollar vs the Rand 

The symbol for the South African Rand is ZAR and it can be traded against a host of other currencies. Whenever someone quotes a USD/ZAR rate, they are essentially giving you a number that denotes the number of ZAR needed to buy one USD. 

In the USD/ZAR pair, the USD is the base currency and the ZAR is the quote currency.

It is like a ratio. In fact, any forex trade involves a pair of currencies. So, you could trade the USD/ZAR, or the EUR/ZAR, or the GBP/ZAR, and so on. 

An exchange rate of 20 for the EUR/ZAR would mean that you need 20 ZAR to purchase one Euro. As the ZAR pairs are ratios, you can either go long or short the ratio. 

So, for example, if you are long USD/ZAR, it would mean that you believe that the US dollar is going to strengthen against the ZAR. It means more ZAR will be needed in the future to buy one USD. 

On the other hand, if you are short USD/ZAR, it means that you think the ZAR will gain against the dollar. If ZAR strengthens or if the USD weakens then the USD/ZAR ratio will fall. 

Going long USD/ZAR means that you are buying dollars with ZAR while going short USD/ZAR means that you are selling dollars. 

At Admirals you have the option to go long (Buy order) or go short (Sell order) via Contracts for Difference (CFDs) with various Forex pairs, shares, commodities, indices and more, including pairings with the South African Rand. 

Currently, you can trade the South African Rand with the following currency pair CFDs at Admirals: USDZAR, EURZAR and GBPZAR. Given the nature of CFDs, you can trade in both price directions as described above. 

Advantages and Disadvantages of Trading the South African Rand 

As with any tradeable aspect or financial market, there are simply always advantages and disadvantages which one must consider before trading or investing. 

These factors are always subjective based on the individual – Please always consider your risk management tolerance before entering any financial markets. 

Some of the advantages of trading the South African Rand can include: 

• Exposure to an African economy 
• Trading in a relatively lower volume asset may result in a higher chance of spotting pricing anomalies to be exploited 

Some of the disadvantages of trading the South African Rand may include: 

• Lower volume might result in lower liquidity. So, the buy and sell price spreads (bid-ask spread) may be wide 
• The South African Rand might have higher volatility which could result in more market risk 

How to Trade the South African Rand: Possible Scenarios 

Traders can deploy a range of strategies when trading currencies like the South African Rand.

Either price action analysis can provide discretionary opportunities to trade or one can conduct back tests and develop a rules-based strategy. 

Traders can also use a host of technical indicators that Admirals offers via the well-known MetaTrader 5 tool and create a rules-based trading system with an edge. 

For example, traders could use two moving averages to trade crossovers.

If the 50-day moving average crosses over the 200-day moving average and then moves higher, it could be a bullish sign. This, naturally, is a general example and should always be compared against all overall factors; individual risk tolerance should always be considered before entering any kind of trade with a financial asset. 

Traders could also look at a set of moving averages and spot phases where most of those averages converge and the price moves sideways.

This low volatility phase could then be followed by a major breakout or breakdown. 

Gain access now to the MetaTrader 5 tool for free, where you can use various trading indicators to design a strategy which works for you. Click the banner below in order to download: 

How to Trade the South African Rand: Conclusion 

We hope that you now have a good idea of what it means to trade the South African Rand (ZAR). We also hope that you now have more insight into how the Rand came into existence and what the structure of the South African economy is. 

As you trade forex, we encourage you to have a risk management system in place. After all, it is only when you protect your trading capital that you can then compound it.

Knowing what your maximum loss limits are, what your risk-reward ratio is for each trade, and using features like stop loss is a vital part of trading. 

If you feel ready to start your trading journey, feel free to open a live account with Admirals and start trading today. Click the banner below to get started: 

Other Articles of Interest:

• How to Trade Volatility
• Top 5 Best Crypto to Watch in South Africa
• Top 5 Best South Africa Stocks to Watch

 INFORMATION ABOUT ANALYTICAL MATERIALS: 

The given data provides additional information regarding all analysis, estimates, prognosis, forecasts, market reviews, weekly outlooks or other similar assessments or information (hereinafter “Analysis”) published on the websites of Admiral Markets investment firms operating under the Admiral Markets and Admirals trademarks (hereinafter “Admirals”). Before making any investment decisions please pay close attention to the following: 

1. This is a marketing communication. The content is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. 

2. Any investment decision is made by each client alone whereas Admirals shall not be responsible for any loss or damage arising from any such decision, whether or not based on the content. 

3. With view to protecting the interests of our clients and the objectivity of the Analysis, Admirals has established relevant internal procedures for prevention and management of conflicts of interest. 

4. The Analysis is prepared by an independent analyst (hereinafter “Author”) based on Brandie E Blackler, Financial Analyst, personal estimations. 

5. Whilst every reasonable effort is taken to ensure that all sources of the content are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admirals does not guarantee the accuracy or completeness of any information contained within the Analysis. 

6. Any kind of past or modeled performance of financial instruments indicated within the content should not be construed as an express or implied promise, guarantee or implication by Admirals for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed. 

7. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, please ensure that you fully understand the risks involved.