USDZAR

Any currency pair such as USDZAR which involves the US dollar is worth taking note of. As the unofficial reserve currency of the world it gives an element of predictability to any pair is it linked to. Throw in the South African dollar, which in many respects is the total opposite and you get a currency pair which will provide Forex traders opportunities to profit!

USDZAR Live chart: Current exchange rate

This Forex chart shows the price and volume data for the U.S. dollar/ South African rand (USDZAR) currency pair over a one-year period.

USDZAR week candle chart (FXCM) Source: TradingView

Screenshot courtesy of TradingView!

How to trade USDZAR

Hedging and speculating are two approaches traders use when Forex trading. Traders commonly use these strategies when trading the U.S. dollar / South African rand (USDZAR) currency pair.

Why trade  USDZAR

There are several benefits to trading the dollar rand currency pair. As an exotic pair, the high volatility can enable successful traders to earn profits at a fast pace. Because of the wide price fluctuations, investors trading in exotic pairs also have the potential to experience higher returns. However, this volatility can work against the trader and lead to losses.

Trading USDZAR gives Forex traders a way to diversify their portfolio. Additionally, the South African economy is more stable than other emerging economies. There tends to be more investor confidence in South Africa compared to its peers. Thus, USDZAR liquidity is generally higher than other exotic pairings, which can be thinly traded.

Lastly, taking advantage of the carry trade is one of the main advantages of a USDZAR trade. A successful carry trade allows an investor to benefit from the disparity in interest rates between the rand and the dollar. Because South Africa is an emerging economy, the nation’s interest rates tend to be higher compared to the U.S. The basis of the trade is to borrow in the lower interest rate currency (the USD) and invest in a higher interest rate currency (ZAR).

A USDZAR trading strategy

Trading the USDZAR provides traders with a high-beta strategy for trading the dollar. A high-beta strategy is one that has a higher return potential but is riskier than most.

Because it is an exotic currency pairing with the potential for high volatility, the USDZAR trade can sometimes magnify dollar themes. A case for this would be an interest rate trading strategy based on changes enacted by the U.S. Federal Reserve.

The reasoning behind the trade is the expectation that tightening monetary policy by raising interest rates should strengthen the domestic currency (USD). In contrast, loosening monetary policy by reducing interest rates should weaken the currency.

For example, between March 2020 and March 2022, the Fed had kept benchmark interest rates near zero to assist the U.S. economy during the pandemic. However, starting in March 2022, the Fed began to incrementally raise interest rates to bring down inflation.

The following USDZAR chart shows the acceleration of the trade starting in April once the effects of rising interest rates began to kick in. This trend continued in May, June, and into July as the Fed continued its rate hikes.

Timing

While the USD to ZAR exchange rate rose to its highest levels since April 2020, it has not been a consistent trajectory. The chart shows several significant down days throughout the period since the Fed began raising interest rates. This highlights the volatility of the trade.

A successful USDZAR interest rate trade will rely on timing. The goal is to achieve profits with minimal costs. For day traders, this means trading during high volume and volatility. You’ll see current volume and volatility by studying a live chart.

Trade Management

This volatile trade requires a trading plan. Evaluate the risk-reward ratio and your personal risk tolerance before entering the trade. Use stop-loss orders to limit your losses should the trade move against you. Create an exit strategy for taking your profits.

Brokers

You may need to shop around to find a broker to trade this currency pair. Not all forex brokers offer exotic pairs such as USDZAR. Those that do may require higher fees and/or lower leverage limits.

News

An interest rate trade is highly reactive to the news cycle. Use an economic calendar to keep updated on news regarding the Federal Reserve and the U.S. economy. Also, be aware of interest rate actions taken by the South African Reserve Bank (SARB). These may also impact price movement.

Hedging

Traders who are looking to mitigate against possible future price fluctuations will employ a hedging strategy using currency trades. For example, an importer or exporter who has South African rand exposure through their business dealings may decide to hedge against possible negative price swings by setting up a USDZAR currency trade.

They enter the trade to lock in a set price at a future date. In essence, they are using the trade as an “insurance contract” in case some future event impacts the profitability of their business. This can be vitally important for companies that must set pricing in their contracts based on foreign currencies that sometimes fluctuate greatly over time.

Speculative trading

A trader who is speculating on USDZAR believes the currency pair will go up or down over a designated time. They will set up their trade to profit from the direction they believe the trade will head. A speculative trader will often use a swing trading strategy or a day trading strategy.

Other common speculative trading approaches include:

• Trend trading: This approach relies on technical analysis to identify where the overall price movement is headed for a currency pair. The trader then places a long or short trade, depending on whether the trend is bullish or bearish.
• Range trading: This approach requires the trader to determine a range of support and resistance for the currency pair. Based on the range’s peaks and troughs, the trader will go long or short.
• Breakout trading: In this method, the trader will look for price movements that break outside historical support or resistance levels. A breakout with increasing volume indicates a potential trading opportunity.

History of USDZAR

Since the 1785 passage of the National Currency Act, the dollar (USD) has been the official legal tender of the United States. It is the foreign exchange market’s most traded currency and serves as the world’s reserve currency.

The South African rand (ZAR) has been South Africa’s national currency since February 1961. Gold is a major export of the country. The rand’s value is somewhat correlated with the price of gold.

There have been many events over the decades that have caused extreme fluctuations in USDZAR prices. Here we show charts for four of these events.

The fall of apartheid

Until the end of apartheid, the rand held a steady peg against the USD. Over the ensuing decades, its value has weakened. This chart shows the depreciation of the rand versus the dollar from 1990 through 1994—the time period when apartheid was dismantled and the new democratic government was formed.

Source: https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/usd/USD-to-ZAR-1990

Global financial crisis of 2008

Many experts were surprised by the dollar’s appreciation during the second half of 2008. On September 29, 2008, the stock market crashed in the wake of the growing defaults in mortgage-backed securities. Instead of pulling the USD down, the opposite happened as investors sought the greenback as a safe haven. The dollar also benefited from the unwinding of carry trades, a dollar shortage, and over-hedging by non-U.S. banks.

These factors combined to strengthen the dollar during the second half of 2008, as we can see from this USDZAR chart:

USDZAR week candle chart (FXCM) Source: TradingView

South Africa enters recession and USD declines

2009 was another tumultuous year for South Africa and the world. The global financial crisis was well underway. South Africa experienced political turbulence as ANC leader Jacob Zuma faced corruption charges just months before the general election. Violent protests erupted over poor living conditions and the nation experienced its first recession in 17 years.

Despite the turmoil in South Africa, the bigger theme for the USDZAR trade was the USD’s decline. In 2009, the dollar weakened considerably against the British pound, the euro, and the yen. Stocks were beginning to rally as investors believed the economic recovery was around the corner. The dollar began to lose its safe-haven demand. We can see the impact the weakening dollar had on USDZAR in this 2009 chart:

USDZAR week candle chart (Oanda) Source: TradingView

The stock market crash of 2020

The stock market crash of March 2020 coincided with growing investor fears about the economic fallout over the COVID-19 pandemic. Investors sold stocks and bonds, seeking safety in cash. Investors worldwide scrambled for U.S. dollars. To meet demand, the Fed created new swap lines to loan dollars to central banks from other countries.

This chart shows how the U.S. dollar dominance impacted the USDZAR trade leading up to and immediately after the March 2020 crash:

USDZAR week candle chart (FXCM) Source: TradingView

Future predictions for USDZAR

Medium-term predictions

The medium-term forecast for the USDZAR trade may hinge upon how long the U.S. Federal Reserve maintains its hawkish stance regarding interest rates. Starting in March 2022, the Fed began increasing interest rates to fight inflation.

This move by the Fed has had significant impact on the dollar rand trade. The rand—along with currencies from other emerging markets—has weakened substantially. As of July 15, 2022, the USDZAR price experienced its third straight week of gains.

Compared to the South African Reserve Bank (SARB), the Fed’s policies have been more aggressive regarding the implementation of higher interest rates. This interest rate price disparity has given the USDZAR bullish momentum. For the medium term, interest rate actions by the Fed and SARB seem to be the key driver to this trade.

Long-term predictions

Moving into 2023, the USDZAR trade may begin to face recession risks in addition to ongoing inflation and interest rate risks. As an exotic trade, USDZAR is highly reactive to economic news. Even the fear of a U.S. or global recession (whether it occurs or not) can cause price volatility and illiquidity.

Traders should watch closely how both the Fed and SARB react to inflation and recession worries. Consider trade risks accordingly. Should you decide to place a USDZAR trade, be sure to have a sound trading plan, one that emphasizes risk management. This is particularly important should trade risks and uncertainty increase in 2023.

The difference between trading and investing in USDZAR

Trading USDZAR

Trading USDZAR is typically a short-term speculative action. The trader hopes to profit from the rise or fall of the currency pair, usually over a relatively short time. Traders use short-term strategies to potentially increase investment returns. They look to take quick profits from the shifting Forex market. Popular strategies include day trading, swing trading, trend trading, range trading, and breakout trading.

Investing in USD and/or ZAR

Currency investors commonly take a longer-term perspective to build wealth over time. They may have longer-term goals, such as investing for retirement or a child’s college education. They may use currency investing as part of their overall portfolio diversification.

In addition to using Forex trading, they may also buy other types of investments to gain exposure to the currency market. This might include mutual funds, exchange traded funds (ETFs), or exchange traded notes (ETNs).

5 Tips for Successful use of USDZAR

• Monitor economic and geopolitical news for events that could impact the USDZAR trade. Review the data for both U.S. and South Africa for important changes. For example, keep an eye out for news about inflation, unemployment, gross domestic product (GDP), trade account balances, political unrest, and fluctuations in the price of gold.
• Look for monetary policy shifts that could affect USDZAR. The central bank for either the U.S. or South Africa can implement interest rate changes that can weaken or strengthen the domestic currency. You may need to adjust your trading strategy based on these policy shifts.
• Learn about different breakout strategies. These strategies use fundamental and technical analysis to help you pinpoint breakouts on price movements. Understanding these breakouts can help you set your trade entry and exit points.
• Understand the risks involved with USDZAR. Your trading plan should reflect the added risks of speculating on an exotic currency pair. You may need to adjust your normal trading practices (such as stop-losses) to accommodate the added risks of trading in a more volatile and less liquid market.
• Be willing to go to the sidelines if your risk-reward analysis is inconclusive or doesn’t show strong upside potential. Don’t succumb to the fear of missing out (FOMO). Sometimes not making a trade is the most profitable action of all.

What are the risks with USDZAR?

There are many risk factors that impact a USDZAR trade and affect the pair’s price movements. As we discussed earlier, volatility and liquidity risks can cause prices to fluctuate rapidly and make it challenging for a trader to enter and exit the market.

Inflation and interest rates often go hand in hand as risks. If inflation is going up, a nation’s central bank will frequently increase interest rates to cool down the overheating economy. Any change in interest rates impacts USDZAR traders who are attempting a carry trade to profit from the interest rate disparity between the dollar and the rand.

Other metrics that can impact a USDZAR trade include unemployment rates and gross domestic product (GDP). Geopolitical events—such as wars, rioting, or the election of a new government—can also impact price movement in a USDZAR trade. South Africa has a history of political instability that has weakened the ZAR.

USDZAR: General terminology

Major currency: Major currencies are the world’s most heavily traded and used for most foreign transactions. They are USD, EUR, GBP, JPY, AUD, NZD and CAD.

Exotic currency: An exotic currency is a currency from a developing or emerging market economy. These tend to be volatile with low trading volumes. An example is Thailand baht (THB).

Exotic currency pair: An exotic currency pair combines a major currency (often USD) and a currency from a developing nation (also known as an emerging market).

Base currency: When quoting a currency pair in the Forex market, the first currency in the quotation is referred to as the “base currency.”

Quote currency: The second currency shown in the currency pair quotation is referred to as the “quote currency.” Another name for this is “counter currency.”

Volatility: Volatility measures the amount of price variation for an asset from its mean price. This statistical measurement is important to traders because assets with high volatility have larger price swings.

Liquidity: Liquidity in the Forex market refers to the number of active traders and the total trading volume. If a market is highly liquid, this means the market is active with participants looking to make trades.

Trading volume: Trading volume in Forex is a measurement referring to the total number of lots traded during a designated time.

Trading spread: In a Forex trade, the trading spread is the gap between the bid and the offer. The tighter the spread is, the less expensive the trade will be.

Commodity currency: A commodity currency refers to a currency that is correlated to a commodity produced by a nation. For example, the South African rand moves in step with gold, which is a key commodity mined and exported by the country.

Conclusion

It takes disciplined effort to become a successful Forex trader. This is especially true if you decide to trade exotics. A key to achieving more wins is to develop a Forex trading plan. The ideal plan will include a risk management strategy. This will keep you focused and help you avoid emotional trading, which is often the Achilles’ heel of beginning traders.

By understanding a trade’s risk-reward ratio, a trader can make important decisions regarding whether the trade is worth the risk. Then, if the trader decides to move forward, it’s a matter of following risk management principles by using appropriate stop losses. While the hope is that every trade will be profitable, a stop loss will help you get out quickly should the tide turn against you.

Frequently Asked Questions (FAQs)

Is USDZAR volatile?

Yes, the USDZAR is volatile. The USDZAR is an exotic currency pair. A characteristic of this trading pair is low trading volume and high volatility.

What is the nickname for USDZAR?

The nickname for the U.S. dollar is “greenback” or “buck.” The South African rand does not have a nickname. As a currency pair, USDZAR does not have a specific nickname.

Why is the South African rand called ‘ZAR’?

The South African rand is called ZAR as a reference to the Dutch Zuid-Afrikaanse Rand. This in turn originates from Witwatersrand, the region where you can find most of South Africa’s gold deposits.

How much is traded in USDZAR a day?

From January 1, 2022 to July 15, 2022, the average daily volume traded year-to-date for USDZAR was 131,553 contracts.

Is the South African rand a safe currency?

Some experts consider the South African rand a risky currency, particularly during times of domestic unrest and global economic upheaval. Historically, the rand tends to weaken during uncertain times. However, because South Africa is rich in resources, the rand can strengthen when the prices of gold, platinum, and other commodities go up.

Is the South African rand correlated with gold?

Historically, the South African rand displays a pricing trend correlation with gold. When the price of gold increases, the rand also strengthens. When gold prices fall, the rand tends to weaken as well.

Does USDZAR have a big spread when trading?

Yes, compared to more liquid currency pairs, the USDZAR will have a bigger trading spread. The difference between the bid and the offer will be slightly wider in a USDZAR trade. This wider spread is a common characteristic of exotic currency pairs.

Which is the safer currency, USD or ZAR?

The USD is the safer currency. ZAR is less stable compared to USD. The USD is the world’s reserve currency and a safe-haven currency. This means that in volatile markets investors will often convert their assets into U.S. dollars for protection.

Should I invest in USD or ZAR?

The answer to this question is… it depends. If the intent behind the question is to determine which currency would be the better investment for you (that is, more profitable), then you would need to review many factors.

You would need to analyze factors that impact the value of the currencies at the given point in time. This includes volatility, supply and demand, world events, and market conditions. You would also need to consider your own personal situation, such as your skill level as a trader and your risk tolerance.

Based on your analysis, you may find that one currency makes a better investment choice than the other. Or you may conclude that neither is a good investment for you.

Should I trade USDZAR?

Like the previous question, there is no “one size fits all” answer to whether you should (or shouldn’t) trade USDZAR. Again, you should analyze the factors impacting the currency pair at the time of your potential trade along with your personal situation.

If you are new to forex trading, you may find it challenging to be successful with an exotic currency pair such as USDZAR. The risks are higher, and you’ll need to understand how to protect yourself from sudden price fluctuations.

A better starting point is to continue your education on forex before jumping into a trade. Begin by reading our article “Top 3 Things To Consider Before Investing In The Forex Market” and “Forex Trading: A Beginner’s Guide.”