In March 2015, a South African tourist carrying 10,000 Rand to the USA would have received about $813. On the other hand, the same traveler would receive only about $646 today. This reflects a depreciation of about 20% in the past year. The demand for safe-haven currencies, exposure to commodities, China’s slowdown, internal issues, and the overall negative sentiment towards the emerging economies led to the rise of the USDZAR pair in the past one year. However, the events in the past two months indicate that the trend is slowly but steadily reversing in favor of the South African Rand.
Firstly, the country is a net importer of crude oil. Thus, the low price of crude continues to shift the balance of trade in South Africa’s favor. Even though financial services contribute to the majority of South Africa’s revenue, still, the country is dependent on the mining sector, which contributes 8.3% of the GDP. The low price of commodities had inflicted considerable damage on the exchange rate of the Rand. On the other hand, the devaluation of the Rand has made exports quite competitive. Furthermore, the recovery in the price of commodities, in the past two months, has led to a better realization of the export revenues as well.
On March 17th, 2016, the Central Bank (South African Reserve Bank – SARB) raised the interest rates by 25 basis points to 7%. The interest rates remain above the inflation rate. This indicates that the real interest rates are in the positive zone. The Central bank has enough foreign exchange reserves of about 45.75 billion to defend the Rand, if necessary. The unemployment rate has decreased from 25.5% in the third quarter to 24.5% in the fourth quarter of fiscal 2015. On a y-o-y basis, the GDP grew 0.6% in the fourth quarter of fiscal 2015 and comfortably went past the analysts’ expectations of 0.4% growth. Thus, fundamentally, we can expect the USDZAR pair to decline further.
Technically, the USDZAR pair has failed to cross the resistance at 16.01 even after three attempts. Secondly, the pair has broken the ascending channel. Thus, considering the scenario, it is imperative that the currency pair would decline in the next few weeks.
Thus, a forex trader should take a short position at 15.50 levels in the USDZAR pair. The stop-loss order for the short position should be placed above 16.00. The target price for the short entry is 14.60. The trade carries a very good risk to reward ratio of about 1:10.
A binary options trader should purchase a one-touch put option contract with a target level near the 15.00 levels. An expiry date in the last week of April would be ideal for the contract.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
