News | October 23, 2019, 14:33 PM | The content is supplied by a Guest author
The following post does not provide investment advice
If you’re a local, you know that things are bleak in South Africa. For 70 straight months, the economy has either shrunk or grown at an annualised rate of less than 2%. Unemployment sits at an eye-popping 29%. Public debt is soaring, leading credit agencies to downgrade SA’s rating to “junk.”
It doesn’t look like things will get better anytime soon. If you’re a Forex trader, though, the economy doesn’t necessarily have to improve for you to prosper. You simply have to have a solid understanding of where the South African Rand (ZAR) is heading. Sprinkle in knowledge of trading psychology, and you can take charge of your future over the coming years.
Below, we’ll talk about where Africa’s most significant currency is moving, and how traders can capitalise on its movements.
Why has the ZAR had a rocky go of things in the 2010s?
It was all going so well. Back in the 2000s, South Africa had found its footing after post-apartheid instability had settled. During that period, the economy grew as fast as a 7% annualised pace per quarter. Then in the 2010s, the economy sputtered and stalled. As stated earlier, the economy has been stagnant for more than five years.
Jacob Zuma, president of South Africa from 2009 to 2018, is partially responsible. During his tenure, his involvement with the Guptas eroded domestic and international trust. Who were the Guptas? These brothers were billionaires with interests in South Africa’s energy and mining industries. To enrich themselves, they bribed Zuma. In return, they gained influence over critical decisions, such as the appointment of ministers. These arrangements disturbed insiders – by the mid-2010s, e-mails began leaking to the press. Before long, the degree to which the Guptas had “captured the state” emerged.
The collapse of state energy utility Eskom was the second ingredient. Back in the 1990s, the wealth gap between the white minority and the black majority was gasp-inducing. As such, the former group consumed most of the energy produced. Then, apartheid ended. Whilst economic inequality remains severe, many South Africans lifted themselves out of poverty over the past two decades. This shift dramatically increased demand for power, far more than Eskom executives were projecting.
The utility borrowed heavily to build additional power plants. This action resulted in debt loads that became unsustainable by the 2010s. During that period, Eskom also used 95% of maintenance funds to build new generators. This unwise action has led to breakdowns in older plants, which provide just under half of South Africa’s power.
A combination of insufficient generating capacity and frequent breakdowns led to load shedding. In recent years, these rolling blackouts have crippled manufacturing plants and other businesses. Finally, climate change has had a significant impact on South Africa’s economy. Drought has ravaged the countryside, severely disrupting crop yields. In Q1 2019, the agricultural sector plunged 13%, followed by a 4.2% YoY contraction in Q2 2019.
Water shortages have also endangered the viability of their cities. In 2018, Cape Town came within three months of “Day Zero.” Had it occurred, Cape Town would have become the first city to run out of water in modern times. Political and environmental turmoil have hammered the South African ZAR during the 2010s. According to XE.com, the GBP/ZAR rate was 11.5755 in October 2009. Ten years later, even with Brexit, GBP/ZAR is now 18.6565 – that’s a depreciation of 37%.
The risks of trading the ZAR are high, but so are the rewards
So, it’s an easy call – stay away from the ZAR, yes? Whilst you could easily lose your shirt, you can make a killing, no matter what the market does. Unlike heavily-traded currencies like the USD, GBP, and EUR, the ZAR is considered to be “exotic.” It has less liquidity overall – when paired with rapid rates of growth or decline, movements can be drastic.
Most Forex traders make leveraged trades and most forex brokers in South Africa offer leverage even up to 1:300. That is, for every unit of their own money, they borrow many more. If they win, they can make sacks of cash. However, if they are wrong, this mistake could clean out their entire account. By employing stop losses and creating sub-accounts, you can limit risk. Should a pairing like USD/ZAR unexpectedly weaken, the first measure will put a floor underneath your losses. But, what if a particularly sharp decline blows through your stop loss? Having multiple accounts ensures you’ll only lose what you have in the relevant one.
However, as we saw from the ten-year trend between GBP/ZAR, gains have been steady and strong. As we’ll demonstrate below, it doesn’t look like the current situation will change anytime soon.
Where is the ZAR heading as we move towards the 2020s?
In February 2018, Zuma finally resigned as President of South Africa. Despite this positive step, the other major issues plaguing this nation’s economy remain. Bailout after bailout has failed to stabilise Eskom. From February to March 2019, South Africa went through the worst bout of load shedding yet. And whilst significant winter rains have partially replenished reservoirs, drought conditions persist.
It’s hard to see any reversal in the weakening of the ZAR looking forward to the 2020s. As we already mentioned, the credit agency that hadn’t downgraded SA government bonds to junk did just that earlier in 2019. If Eskom runs into financial trouble again (they will), the government may not be able to help. Also, climate change will continue to ravage Southern Africa. Even if we take drastic action, global temperature will rise by at least 2 degrees by 2050. This warming will increase the severity of droughts, which will further damage agriculture and water supplies.
Given the dysfunctional nature of South Africa’s government, things will get worse before they get better. As such, we expect the ZAR to continue weakening against most major currencies as we move towards the 2020s.
Currencies like the ZAR can make you rich… or send you broke
That said, exotic currencies like the ZAR can fluctuate day-to-day or even hour-to-hour. If you trade a ZAR pairing without proper risk management, one market movement could wipe out your bankroll.
Alternatively, if you trade safely and make moves based on solid technical analysis, you can make a bundle.
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