The South Africa currency, the rand, is in trouble, as is the nation’s general economy. There are many reasons behind the nation’s recent financial woes, most of them completely dependent on global economic forces and the current monetary disasters taking place in China. But for forex traders who often go either short or long on particular currencies, the continuing problems of South Africa present several very real opportunities.
That’s primarily because foreign exchange transactions have high profit potential for investors who have solid evidence about the near-term direction of a currency’s value. It doesn’t matter whether the direction is up or down. It’s the amount of certainty that gives power to the profit potential. But step one for people who want to enter the FX marketplace, and take advantage of the unique situation, is to learn the key components of South Africa’s woes.
Understanding why the rand is ailing is central to earning a forex (FX) profit by speculating on near-term strength and weakness. So, what is forex and how do people trade currencies? Brokerage sites make it easy to open accounts and begin trading with very low initial balances. The gist of the process is to choose a pair, or a set of currencies in which one is the base and its value is expressed in terms of another one. So, when you see USD/ZAR at 15.08, that means it takes one U.S. dollar to purchase 15.08 rand, (which are abbreviated as ZAR). In the notation, USD/ZAR, the dollar is the base and ZAR is the counter.
Why the Rand is in Deep Trouble
Before jumping in and taking a position on the dollar/rand pair, it’s essential to look at the core reasons for South Africa’s general economic weakness right now. For starters, the country relies heavily on exporting raw materials to China. Thus, with China’s economy at what is likely the beginning stage of a massive financial crisis, orders for South Africa manufactured and raw good are way down. Add to that the global oil and energy crisis, which impacts South Africa especially harshly because the country is a major importer, not exporter, of crude petroleum. When your main buyer is facing bankruptcy, of sorts, and one of your key imports significantly in price, bad things happen to the national money denomination, in this case the rand, aka ZAR.
Price Action to Watch
For casual, beginning, intermediate, and advanced FX trading enthusiasts, all that bad news adds up to a solid investment opportunity. Speculating on more short-term trouble for ZAR represents a fact-based forex play that has the potential to deliver tidy profits. However, markets are never a sure thing, so anyone can lose money when guessing the direction a particular FX pair. In order to gain a measure of objectivity, examine recent price action in the USD/ZAR chart values.
As 2021 began, the value was 16.71, meaning that one dollar could buy 16.71 units of the ZAR. Things got much better by early June when the number reached an annual low of 13.4, indicating that the South Africa unit was strengthening. Since then, however, the situation has declined, with values dancing around the 15.00 mark and looking to probably get much worse before recovering. Why worse? Three key factors are hitting the currency hard: rising oil prices, China’s continuing meltdown, and domestic inflation.
Follow the Factors
There’s more to FX dealing than immediate conditions like the three that are battering South Africa’s economy. Many forex traders simply watch minute-by-minute price action to get a feel for what the daily chart might do. For instance, early morning bad news can cause a session-long free fall in rates and offer good chances for speculating on monetary weakness.
Avoid Long-Term Predictions
In the world of foreign exchange trading, it’s often true that short-term fluctuations are much easier to envision than long-term ones. Perhaps that’s the thinking behind the fact that long-term FX speculation is usually done by institutions and large-scale investors. Everyday traders tend to enter and exit positions in time periods of one month or shorter.
But, in the end it’s up to the individual to decide whether to use short, intermediate, or long-time horizons. With South Africa’s current economic state, it’s hard to see a short or even medium timeline that offers chances for significant improvement. For traders just getting into FX, or who still consider themselves beginners, there are plenty of excellent opportunities with the rand and other currency pairs where the short-term outlook for financial weakness or improvement appears to be backed by reliable, objective data.