Traders around the world have taken 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 have been highly volatile. Many people have 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.
Hit hard in the middle of 2018 by the global turmoil in emerging markets, ZAR has made quite a comeback since then as risk sentiment has improved. Other factors include stock markets’ correction and ongoing rate differentials. However, many traders didn’t profit from the rand’s recovery over the past couple of months. They wondered how others knew that Africa’s second-biggest economy wouldn’t stay in recession for long. In reality, though, there’s more to it than that.
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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.
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.
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.
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.
2018 has been 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 this 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:
The first steps before trading the rand are answering these questions and apply 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.
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