Big question while market hitting new highs is it possible to make a clear decision?
First of all, let’s answer to the simple question what is ZAR and what affects it as currency?
The South African Rand is the currency of South Africa. The most popular trade currency, South Africa Rand exchange rate is the USD to ZAR rate. This pair is one of the most famous in forex exotic segment. Over the past few years, its rate has been nothing else but volatile, giving savvy investors the opportunity to profit from the rapid market fluctuations.
For the last couple of months, USD/ZAR gained an enormous amount of volatility to its investors. Volatility spiked up from 4.86% to 9.77%. From the first look, it seems massive returns can not be easier earned in this wild pair, but without risk, investors would not get a reward.
Pair challenges begin when we dig deeper, what supports the currency. ZAR is considered to be a commodity-backed currency. As South Africa is rich in mineral deposits, including diamonds, gold platinum, and iron ore, its currency value depends heavily on the performance of the global commodities market. As we have seen in the last couple of weeks it was hard for the market. Gold dropped from its highest point in the last couple of years, contraction in economy send platinum and other precious metal prices down. The export of platinum in 2019y increased by 6% which holds 8.67% of total export. Correlation between USD/ZAR and platinum is inverse.
The simplicity of correlation is inverse if the price of platinum shows weakening USD/ZAR in usual cases would soar.
Distribution analysis shows that the market moved abnormally 11.92% and it hits 2 standard deviation band. These extreme cases have not happened times in the last 10years.
What is distribution analysis?
In 2019, both the US dollar and the South African rand have witnessed many rate jumps and downs reflecting continuous escalations and de-escalations in the global trade and political tensions. Nonetheless, the vast majority of the USD to ZAR forecasts look quite promising.
One of the biggest chemical companies dropped since last month 357% for some of the traders it was a good opportunity to earn money, but is it good for South Africa’s economy?
Correlation of currency pair and SSL is inverse it is the second factor that companies cannot support the currency in these wild days.
last but not least important factor is differentials between currency rate and the whole South Africa market exchange is inverse and plunged 13% since February, compared year to year change it is making new lows around 20%. Negative correlation shows ZAR strengthening compared with the global market SPX index which plunged 27% last week.
Decision taking
The main advantage of choosing exotic pairs over majors is that with lower liquidity comes higher volatility, which, in turn, may offer higher potential returns due to wider price fluctuations. However, remember that this also entails a higher risk factor.
Before investing in the USD/ZAR pair, I suggest you to arm yourself with as much knowledge as possible. Keep an eye on the economic calendar to stay on top of the events that may cause volatility in the pair’s rate.
