How to Trade USD/ZAR: Strategies & Insights

Trading the USD/ZAR pair requires a solid grasp of historical contexts, geopolitical influences, and market mechanisms and how they shape the dynamic relationship between the US dollar (USD) and the South African rand (ZAR).

In this Plus500 guide, we'll explore the evolution of the USD/ZAR exchange rate and uncover the factors that drive its movements.

Additionally, we'll explore why trading USD/ZAR may present potential opportunities for forex traders seeking diversification and speculation.

Understanding USD/ZAR Trading

In the USD/ZAR currency pair, the US dollar functions as the base currency, while the South African rand is the quote currency. As a result, the USD/ZAR exchange rate represents the amount of South African rand needed to purchase one US dollar.

For example, if the USD/ZAR rate stands at 16.50, it indicates that 16.50 South African rand are required to buy 1 US dollar.

In forex markets, trading a currency pair involves monitoring the exchange rate's fluctuations to capitalise on potential profit or loss resulting from these movements.

To trade effectively, traders must understand the drivers of exchange rate movements within a pair and anticipate the factors that may influence future movements.

USD/ZAR History

Exploring the dynamic history of the USD/ZAR currency pair sheds light on the relationship between the US dollar and the South African rand, reflecting economic shifts and geopolitical events over the decades.

ZAR History

The South African rand (ZAR) was introduced in 1961, replacing the South African pound as the official currency after South Africa attained republic status. Governed by the South African Reserve Bank (SARB), the rand is also recognised in the Common Monetary Area shared with Lesotho, Namibia, and Eswatini.

Initially valued at around R1.5 per USD, the rand experienced depreciation over time, particularly during the apartheid era when trade sanctions led to significant fluctuations.

USD History

The US dollar ($), denoted as USD, has been the official currency of the United States since the National Currency Act of 1785. It emerged as the world's primary reserve currency following the Bretton Woods Agreement of 1944, establishing fixed exchange rates.

However, the abandonment of the gold standard in 1971 liberated the USD from fixed valuations, allowing it to freely fluctuate in global forex markets as a free-floating currency.

Today, the USD maintains its dominance as the main reserve currency, widely held by central banks worldwide. Its role in international trade is significant, with many transactions conducted in USD to mitigate economic risks.

USD/ZAR History

The history of the USD/ZAR currency pair began with an exchange rate of 1.40 US dollars to 1 rand, maintaining stability for its first decade. However, the rand's value declined significantly thereafter, partly due to inflation and increasing international opposition to apartheid.

By 1985, the exchange rate had shifted to 2 rands per US dollar, leading South Africa to temporarily halt foreign exchange trading to stabilise its currency.

The rand continued to depreciate throughout the 1990s and early 2000s, reaching almost 14 ZAR to 1 USD by 2001.

For example, starting from an exchange rate peak of roughly R2.90 to 1 USD in August 1991, the rate surged to R6.27 to 1 USD by May 1999. Subsequent economic downturns, like the mining industry slump in 2012, exacerbated the rand's decline, trading at over 15 ZAR to 1 USD by 2014.

Economic challenges, including high poverty rates, crime levels, political instability, and unemployment, have continued to impact South Africa's currency.

Over the past decade, the rand has consistently lost value against the U.S. dollar, showing significant fluctuations. Notable peaks include January 2016, when it reached around R16.77 per dollar, and March 2020, amid the Covid-19 pandemic, where it climbed to about R19.02 per dollar.

As of April 2024, the rand was trading at approximately R18.88 against the dollar, reflecting its ongoing depreciation.

Factors Influencing the Movement of USD/ZAR

Understanding the fluctuating dynamics of the USD/ZAR exchange rate requires examining a multitude of factors. While central bank policies, geopolitical events, and commodity prices are prominent influencers, they represent just a fraction of the complex web of elements shaping currency values and exchange rates.

Central Bank Policies

Interest rates, inflation, and exchange rates are tightly interconnected, with central banks using interest rate adjustments to influence both inflation and currency values. Higher interest rates typically strengthen a country's currency by attracting foreign investment, while lower rates can weaken it by discouraging such investments.

Despite this relationship, numerous other factors complicate currency value and exchange rates, notably the interplay between higher interest rates and inflation.

Geopolitical Events

The value of a currency like the ZAR is influenced by factors beyond just economic indicators, with political stability and economic performance being key drivers. Traders are wary of political instability or economic uncertainty, which can increase political risk and deter capital investment. Notably, during South Africa's apartheid era, international sanctions led to a marked depreciation of the Rand.

Commodity Prices

South Africa's economy relies significantly on exporting commodities, earning the Rand its 'commodity currency' moniker in financial circles. Gold was the primary export in 2021, making up 14% of South Africa's total exports, valued at $20.1 billion, along with other commodities such as palladium and iron ore. Moreover, as of 2022, pearls, precious stones, metals, and coins constituted South Africa's largest export category, with a total export value of approximately $25 billion.

Changes in commodity prices may have the ability to directly impact South Africa's export earnings, which subsequently affect the USD/ZAR exchange rate.

Why Trade USD/ZAR

Trading the USD/ZAR currency pair offers forex traders an opportunity to diversify their portfolios. By entering the South African market, traders seeking risk can find growth potential.

Due to its exotic nature, USD/ZAR exhibits high volatility, allowing adept traders to potentially capitalise on swift profit opportunities. However, this volatility also presents risks, as sharp price fluctuations can result in substantial losses.

How to Trade USD/ZAR

There are various ways to trade the USD/ZAR currency pair, including spot forex, futures forex, and forex CFDs. Exploring these options offers traders a holistic understanding of the market, empowering them to make informed decisions aligned with their risk tolerance and trading preferences.

Spot Forex

Spot forex refers to the immediate exchange of currencies at the current market rate. It’s commonly used for transactions like international travel, where one exchanges their national currency for the destination country’s currency. It's a prevalent form of currency trading conducted on the spot.

Futures Forex

Forex futures are contracts between parties to buy or sell a set amount of currency at a predetermined date, price, and quantity in the future, traded on regulated exchanges such as the Chicago Mercantile Exchange.

Trading USD/ZAR Using CFDs

Trading USD/ZAR with Contracts for Difference (CFDs) offers the opportunity to speculate on the relative strength or weakness of the US dollar against the South African rand.

Unlike spot forex and forex futures that use centralised exchanges, CFDs are traded directly between two parties, allowing for more flexibility in trading.

When engaging in forex CFD trading, you're essentially making predictions on price movements of the USD/ZAR exchange rate. You can initiate a "Buy" position if you anticipate the exchange rate to increase or a "Sell" position if you anticipate a decrease.

A "buy" or long position in CFD trading indicates the expectation of the underlying asset's price to rise, while a "sell" or short position indicates the anticipation of a price decline. These positions allow traders to potentially make profit or losses from the price difference between the entry and exit points of the CFD position without owning the actual asset.

With CFDs, traders can capitalise on the difference between the contract’s opening and closing prices, measured in pips.

Utilising leverage in CFD trading enables traders to control larger positions with a fraction of the total value through margin deposits. However, carefully managing risks is essential, as leverage can magnify both profits and losses.

Trading Strategies for USD/ZAR

When trading USD/ZAR, traders typically adopt either fundamental or technical analysis strategies. Fundamental traders delve into economic, political, and global factors to gauge a currency's trajectory, considering geopolitics, central banks, and economic data. Technical analysis relies on chart patterns and past price movements to identify potential trends using indicators like volume and price fluctuations.

Day Trading

Day trading USD/ZAR involves frequent small trades executed within the same trading day, exploiting short-term market movements. To manage positions, day traders quickly respond to market shifts using stop orders such as 'Close at Profit' and 'Close at Loss.'

Trend Trading

Trend trading in USD/ZAR focuses on capitalising on price trends over various time frames. Traders evaluate trend stability and establish entry and exit points. Traders should be aware of minor price fluctuations that can go against the trend and result in losses. This strategy can be adapted to short, medium, or extended time frames, aligning most with position trading approaches.

Breakout Trading USD/ZAR

Breakout trading in USD/ZAR entails seizing opportunities when the currency pair breaches significant support or resistance levels. Traders aim to capture new trends emerging from price movements outside the current range. This approach is vital for capitalising on forex market volatility.

Regardless of the approach employed, every trading strategy has the potential to generate significant profits or losses owing to market volatility.

Risk Management Strategies for USD/ZAR

When trading USD/ZAR through CFDs, managing risk is paramount to safeguarding your capital. Utilise tools like 'Close at Profit' and 'Close at Loss' orders to preset closure points, shielding profits and minimising losses. However, bear in mind that these orders don't guarantee closure at your specified price due to potential slippage in volatile markets.

Incorporating a 'Guaranteed Stop' order into your trading strategy imposes a definitive ceiling on potential losses. Regardless of market fluctuations, this order ensures automatic closure at your predetermined price, eliminating the risk of slippage. Nevertheless, it's crucial to note that Guaranteed Stop orders may not be available for all trading instruments and unlike 'Close at Profit' and 'Close at Loss' orders, there are costs usually associated with them.

Implementing a Trailing Stop order can help secure profits while allowing room for market movements. Setting a trailing stop loss can enable you to maintain an advantageous position while locking in gains as the market moves in your favour. Yet, fluctuations in market price can still lead to potential slippage, impacting the exact execution of your stop loss.

Conclusion: Understanding the USD/ZAR Currency Pair

Trading the USD/ZAR pair requires a deep understanding of historical trends, geopolitical factors, and market fundamentals. Analysing the exchange rate's past reveals the complex factors influencing its current movements, including central bank policies, geopolitical events, and commodity prices.

Due to its unique characteristics and high volatility, USD/ZAR trading can offer diversification and speculation opportunities for forex traders, but it can also involve losses.

Various trading methods, such as spot forex and forex CFDs, allow traders to capitalise on the pair's fluctuations. However, achieving success in USD/ZAR trading relies on implementing solid strategies and careful risk management.

FAQs on USD/ZAR Currency Pair

What historical events have had the most significant impact on the USD/ZAR exchange rate?

Historical events such as the apartheid era, international sanctions, and economic downturns have significantly influenced the USD/ZAR exchange rate, causing notable fluctuations over time.

How do central bank policies influence the movement of the USD/ZAR pair, and what indicators should traders monitor?

Central bank policies can impact the USD/ZAR pair through interest rate adjustments, affecting inflation and currency values. Traders should closely monitor interest rate decisions and economic indicators to gauge potential movements in the exchange rate.

What are some risk management strategies for trading USD/ZAR?

Risk management is crucial when trading USD/ZAR. Strategies such as utilising 'Close at Profit' and 'Close at Loss' orders, incorporating Guaranteed Stop orders, and implementing Trailing Stop orders can help safeguard investments and minimise potential losses. However, it's important to note that these strategies don't eliminate all risks associated with trading.