The forex market is crucial to the global economy as it facilitates international trade and investment, enables businesses to manage their foreign exchange risks, and allows individuals to invest in currencies for profit. The importance of currency trading can be seen in its sheer size and liquidity, with an estimated $6.6 trillion traded daily in the global forex market. This makes it the world’s largest and most liquid financial market, offering traders the potential for high returns with relatively low transaction costs.
In South Africa, the forex market significantly contributes to the country’s economy. Its currency, the South African rand (ZAR), is one of the most actively traded emerging market currencies. The forex market in South Africa is regulated by the Financial Sector Conduct Authority (FSCA) and offers opportunities for both local and international traders to participate in the market.
The South African forex market is known for its volatility, with the ZAR being influenced by various factors such as commodity prices, political developments, and global economic conditions. However, with the right knowledge and strategy, traders can navigate this market and potentially profit from its fluctuations.
Characteristics of the South African Forex Market
The short abbreviation for the rand in foreign exchange (forex) markets is the South African rand (ZAR), the nation’s official unit of account. The South African rand, made up of one hundred cents, is frequently represented with the letter R. The term “Witwatersrand,” which means “white waters ridge,” is where the rand gets its name.
Just before the establishment of the Republic of South Africa, the South African rand (ZAR) was initially issued in February 1961. The rand replaced the South African pound. The exchange rate of the rand and the dollar until the early 1970s was roughly R1.5 (USD). But during the succeeding decades, the rand’s value has declined or weakened, making it more expensive to convert one rand into a dollar. For instance, in 1990, the exchange rate was about R2.55 for one USD; in 1999, it was R6.14 for one USD.
If you are a forex trader in South Africa, you have to develop an idea about the different types of currencies that are traded. This will help you to select the best forex brokers in South Africa.
In its early years, the rand’s value was mostly based on the cost of gold, South Africa’s principal export. Due to the South African economy’s continued reliance on its gold exports, there has been some correlation between the rand and gold prices in recent years.
The most popular export from the nation, worth $16.8 billion or 15% of all exports in 2019, is gold. Palladium and iron ore are among the additional goods that South Africa sells, primarily to China, Europe, and the US.
However, the trajectory of the ZAR price has also been influenced by significant global events. Because of the uncertainty caused by the September 11 attacks in 2001, the rand plunged, reaching a low of R13 to the dollar (USD).
The rand suffered during the 2007–2008 financial crisis after the currency had been stable for several years. As investors flocked to safe-haven currencies like the US dollar and Japanese yen, emerging market currencies fell (JPY). Between January 2008 and January 2009, 12 months, the rand lost more than 35% of its value against the dollar.
Regulation Framework: The FSCA, which is in charge of monitoring financial institutions’ behavior and making sure they abide by pertinent rules and regulations, oversees the South African currency market. South African forex brokers must hold licenses and abide by stringent rules, which include safeguarding customer funds, segregating client funds, and being open about their trading methods.
The FSCA also controls how market players behave and has taken action to raise market accountability and transparency. This includes the demand that South African forex brokers provide the clients with their trading statistics, such as the proportion of profitable trades and the spread they charge.
The Most Traded Currencies in South Africa
According to the poll, EUR/USD is the most actively traded currency pair in South Africa, accounting for 24.0% of all daily forex deals. The appeal of the EUR/USD pair is due to its representation of the two largest economies in the world: the US and the European Union.
The huge daily volume of EUR/USD trades guarantees the pair’s high liquidity, often producing narrow spreads. For traders, liquidity and tight spreads are alluring because they allow for the execution of huge trades with little disruption to the market.
The USD/JPY currency pair also called “the gopher” consists of the US dollar and the Japanese yen. With 13.2% of daily forex transactions, it is the second-most traded forex pair in South Africa.
Everyone knows that the US dollar is the most traded, and the Japanese yen is Asia’s most widely traded currency. Like EUR/USD, USD/JPY is renowned for its high liquidity. The Bank of Japan (BoJ) sets interest rates for the Japanese economy like that of the Federal Reserve and the European Central Bank (ECB), which impacts how much the yen is worth in relation to the US dollar.
A survey indicates that 9.6% of all daily FX transactions are GBP/USD-related. It is the third most traded currency in South Africa. Like most other currency pairs, the strength of the GBP/USD currency combination is based on how well the British and American economies are doing. The pound will probably increase versus the dollar if the British economy expands more quickly than the US economy. The opposite is true, though, if the American economy is performing better than the British economy.
The fourth on the list is the currency pair AUD/USD, also known as the “Aussie.” The value of Australia’s exports, which include commodities like iron ore and coal and make up a sizable amount of the nation’s gross domestic product, is strongly correlated with the Australian dollar’s (GDP) value.
Likely, a decline in the price of these commodities on the global market would result in a corresponding decline in the value of the Australian dollar. This would result in a stronger US dollar, making buying one Australian dollar in the AUD/USD currency combination cheaper.
The AUD/USD exchange rate is influenced by the difference in interest rates between the Reserve Bank of Australia (RBA) and the US Federal Reserve, just as the currency pairs listed above. For instance, if US interest rates are low, the US dollar would likely weaken against the Australian dollar and would cost more US dollars to acquire one.
Last but not least on the list is the Loonie. It is called so because of the loon bird on Canadian dollar coins. It stands for the union of the US dollar and the Canadian dollar. Oil is Canada’s principal export. Hence the value of the Canadian dollar is directly correlated with the cost of the commodity.
Canada may make a sizable amount of US dollars through its oil exports because oil is valued in US dollars on international markets. As a result, the Canadian dollar will likely appreciate relative to the US dollar if the price of oil rises.
Factors that influence currency trading in South Africa
- South Africa is a large producer of gold, platinum, and other precious metals, affecting commodity prices. Given that the nation’s economy is strongly dependent on the production and sale of these commodities, changes in their pricing can have a major impact on the value of the ZAR.
- The value of the ZAR can also be impacted by political instability, changes in governmental policies, and geopolitical conflicts. For instance, heightened currency volatility may be brought on by uncertainty about the execution of economic reforms or future leadership changes.
- Changes in interest rates may also have an impact on the value of the ZAR. Increased demand and a strengthening of the currency might result from higher interest rates making the currency more appealing to overseas investors.
Trading Strategies for the Most Traded Currencies in South Africa
Forex trading strategies are tools traders use to research the currency market and make wise trades. Common forex trading tactics include technical analysis, fundamental analysis, carry trade, and breakout trading. Fundamental analysis examines economic and political events, whereas technical analysis uses charts and indicators to understand market trends. Breakout trading comprises currency pairings that have crossed important support or resistance levels. In contrast, carry trading entails borrowing money in one currency at a low-interest rate and investing in another at a higher rate. Before engaging in trading activities, traders should be thoroughly aware of the dangers involved with each strategy and the forex market.
Trading Strategies for the Most Traded Currencies in South Africa
Forex Scalping Strategy
Scalping is preferred by forex traders who favor making quick trades that last only a few minutes or aim to profit from several price changes. The primary goals of forex scalping are to accumulate these modest but regular earnings and to minimize losses. Even though these short-term transactions only entail minor price changes (a few pips), when used in conjunction with large leverage, a trader still runs the danger of suffering sizable losses.
Those who can devote their time to the busier trading times and keep their attention on these quick trades are often the best candidates for this forex technique.
It is an alternate forex trading method if you wish to trade for brief periods but are uncomfortable with scalping’s hectic pace. This usually just entails one trade each day that is carried out during the day. Any intraday price changes in the relevant currency pair result in gains or losses.
For this kind of trading, you’d need enough time to conduct background research, keep track of the deal, and understand how the economy might impact the pair you’re trading. Your position might be affected if significant economic news were to emerge on that day.
Even using free forex signals can help traders predict the market move and they can earn big way by implementing this strategy while trading.
Associated Risks with Trading
Market volatility, leverage, regulatory risks, liquidity risks, and counterparty risks are all dangers of forex trading in South Africa. Leverage can both multiply earnings and losses in the extremely volatile forex market. Regulations that can have an influence on trading activity are among the regulatory hazards. The prospect of not being able to buy or sell a currency at the price desired constitutes a liquidity risk. In contrast, counterparty risk is the likelihood of a trading partner defaulting on a transaction. Traders need to be conscious of these risks and take action to protect their money.
The majority of profitable forex traders create a strategy and refine it over time. While some choose to concentrate on a single research or calculation, others choose to make their trades using a broad range of data. One straightforward tactic is based on relative changes in interest rates between two different nations.
Further study on the subject of forex trading in South Africa is needed in a number of areas. The effect of regulatory changes on the forex market and how traders can adjust to these changes are two areas that could be further investigated. The creation of novel trading approaches that take into consideration the special features of the South African FX market might be a further subject of study. The impact of technology on forex trading in South Africa and how traders might use technology to improve their trading activities are also the subjects of research.
Losses resulting from foreign exchange trading may be more than anticipated due to a long list of hazards. Leveraged trades tend to result in significant losses and illiquid assets, even with a small beginning charge. Political unrest and time zone differences can also impact currency exchange rates. Although forex has the biggest trading volume, there are dangers involved that can result in significant losses.