In the Forex market, the South African Rands is experiencing a steadfast increase not just in the country but also in other countries. In fact, it has increased more outside South Africa. Traders turn towards a currency when it is doing well value-wise and that’s the advantage the Rand is enjoying. There are lots of reasons for this.
Rand Value History
When ranking countries with the strongest economies in Africa, South Africa comes 2nd, bested only by Nigeria. However, the Rand has a negative trend in history. For more than 30 years, it currency experienced a downtrend. This has been attributed majorly to the high performance of the US dollar, corruption in the government, constant power outages, and investment uncertainties.
Nevertheless, the currency picked up a stable trading pattern around 2013/2014 and managed to maintain this pattern for about 5 years until late 2019. This was because of the outbreak of the coronavirus which began in China. China happens to be South Africa’s largest export market. With COVID-19 quarantine and lockdown, the country’s global trade was largely affected and this caused the Rand to weaken.
The impact was major such that the tabs traded a little bit above its weakest level ever against the USD at the start of 2020. At one point, it was the most weakened currency against the dollar. Eventually, 2020 saw the country’s economy enter a recession. It was its steepest decline since 1960.
However, as 2020 draws to a close, the Rand is attracting a great amount of Forex traders who in most cases trade with forex brokers that are regulated by the FSCA in South Africa. Much of it has been attributed to hopes of a COVID vaccine coming out.
Dollar Influence
The performance of the South African Rand is relative to the performance of the US dollar, just like the majority of other currencies. If the dollar value is rising, other currencies are likely to experience a negative impact.
However, in 2020, the USA has had to deal with other matters such that it seems not much attention is paid to their economy. One is the COVID-19 coronavirus which almost every other world country is also dealing with and then the elections.
Rand’s Stand In The Global Forex Market
As of 2019, the Rand was 18th on the list of the most traded currencies in the world. Rand trading currency took up 1.1% of the total daily forex trades across the globe. Comparing this, the Rand was the 20th most traded currency in the world as of 2016. Two positions in 3 years up might not seem too significant but for a very competitive market, it is.
BIS Global Foreign Exchange Market report in April 2019 states the net volume of global rand trading to be $72 billion. Likewise, ZAR/USD and ZAR/JPY were the most traded Rand pairs in the market.
Speculation on these rand pairs and others also contributed to the increase in trading most especially for international investors. With the country, the majority of rand trading is done by banking systems and other local financial institutions. They account for only 16% of Rand trading which leaves 84% to international traders.
Top Trade Transactions
Most common transactions in the market include swap transactions, forward transactions, and spot transactions. According to SARB international economic data report, swap transactions totaled $8.7 billion, forward transactions totaled $1.2 billion, while spot transactions totaled $1.728.
Forward and spot transactions done at the same time by the same traders are called swap transactions.
A forward transaction is a Forex transaction whereby two currencies are exchanged based on their future rate following a contract or agreement on a given date. The ‘future’ is usually not a very long time. Some forward transactions are executed within 2 to 4 business days.
On the other hand, Spot transactions are Forex transactions whereby two currencies are exchanged based on their rate on the same day of the next two businesses. They are relatively the most common type of forex trading in the world; hence, they amount to a total of $8.7 billion in Rand trades within South Africa.
Top Trade Platforms
As mentioned earlier, the majority of Rand trading within South Africa is carried out by financial institutions and banks. A very small percent is derived from speculative trading by local forex traders. Speculative trading involves making presumptions on currency movements and hedging against market volatility.
Bottom Line
With a GDP of $350 billion and the second-largest economy in Africa, it’s expected that the Rand would be one of the most traded currencies in the world. However, several factors have contributed to making the Rand currency trend downwardly against the seemingly ever-dominant US dollar.
However, with the coronavirus virus affecting major countries and the US elections, a lot of currencies are experiencing growth and declines. The Rand happens to be on the positive side as trading has increased by close to 200% especially outside South Africa.