DailySun
Over the past month, the exchange rate between the US dollar and the South African rand (USDZAR) has experienced notable fluctuations, driven by mounting uncertainty in both the local and global economic landscapes.
Key factors such as the US elections, interest rate announcements from the US Federal Reserve and the South African Reserve Bank (SARB), along with inflation reports from both countries, frequently result in increased volatility in emerging market assets like USDZAR.
Let’s delve deeper to explore potential strategies that could take advantage of these trading conditions through advanced platforms like PrimeXBT. Recently, PrimeXBT, a leading multi-asset broker, gained regulatory approval from the Financial Sector Conduct Authority (FSCA) in South Africa, allowing traders to capitalize on various assets, including USDZAR.
SARB announces consecutive interest rate cut
For the second consecutive time, the SARB has reduced the prime interest rate by 25 basis points, now standing at 7.75%. This decision follows significantly lower-than-expected annual inflation figures, with the rate dropping to 2.8% in October from 3.8% in the previous month—representing the lowest rate since June 2020.
South Africa’s inflation rate at its lowest since 2020
Source: Statistics South Africa, South African Reserve Bank, Bloomberg
After the SARB’s announcement of the interest rate cut, the rand appreciated by approximately 0.5% against the dollar that same day.
Despite this being the second rate cut in a row, it indicates a degree of ‘caution’ from the SARB. Economists speculate that the rand may maintain its strength and perform favorably as a result of this decision. However, with Donald Trump’s victory in the US elections, there are concerns that his proposed tariff measures and tax cuts could bolster the US economy, thereby applying pressure on the rand.
South African interest rates
Source: Statistics South Africa, South African Reserve Bank, Bloomberg
How is USDZAR responding to these economic developments?
An analysis of technical indicators reveals that the USDZAR pair continues to exhibit a strong bullish trend. If the Trump administration’s policies, particularly the increased tariffs on imports, come into play, they could impose considerable stress on countries like South Africa. These tariffs would raise import costs, thereby driving up domestic prices and intensifying inflationary pressures.
Dollar versus rand (USD/ZAR)
Source: Tradingview (PrimeXBT)
The SARB’s most recent inflation predictions indicate that this factor is reflected in their expectations, suggesting inflation could rise to approximately 4% by July 2025.
SARB inflation projections
Source: Statistics South Africa, South African Reserve Bank, Bloomberg
Taking all these aspects into account, what lies ahead for USDZAR?
Since Trump’s election win, the rand has depreciated by over 3.5% against the dollar, indicating that further upward movement could be anticipated.
Several crucial events on the horizon could influence the dollar’s performance as we near the new year. Of particular significance are the forthcoming Federal Open Market Committee (FOMC) interest rate decisions by the Fed and the interest rate meetings of the Bank of Japan (BoJ) in December.
Is the risk of a carry trade unwind emerging once again?
These impending interest rate decisions, especially from the BoJ, will be pivotal in assessing carry trade risks.
Reflecting on early August, the market was shaken during ‘Black Monday’ when the BoJ raised interest rates for the first time in years.
The current risks largely hinge on Japan’s core inflation data; should it persist in rising and overshoot the BoJ’s targets, a further rate hike is expected at their December meeting. Recent inflation figures from Japan paint a complex picture, with inflation recorded at 2.3% in October, a slight decrease from 2.4% in the prior month.
Japanese core inflation data
Source: Ministry of Internal Affairs, Bloomberg
Analysts expect that this data will keep the Bank of Japan aligned towards normalizing its monetary policy, potentially leading to a rate hike announcement in December.
If this scenario unfolds, could we see a significant financial market drop in the upcoming months?
The Japanese yen has a strong correlation with commodities, including gold.
Increased interest in safe-haven assets
The value of the rand is closely linked to gold prices, often reflecting an inverse relationship with currency pairs like USDZAR.
This correlation is due to the significant impact that commodity prices, particularly gold, have on local currency assets like USDZAR, as South Africa is one of the largest global gold exporters.
Currently, a rising trend in gold demand has been noted, peaking notably from late November to early December. While this trend is primarily fueled by escalating geopolitical tensions between Ukraine and Russia, could it also be influenced by the risks associated with carry trades?
Surge in gold demand
Source: Bloomberg
The chart below for gold (XAUUSD) illustrates this trend, highlighting the increase in demand. Gold experienced an impressive week-on-week rise of more than 5%, elevating prices back above $2,700. Should gold maintain its strength, it may have a direct effect on the pricing of related assets like USDZAR, potentially resulting in a stronger rand and a lower USDZAR rate.
Gold (XAU/USD)
Source: Tradingview (PrimeXBT)
Trade USDZAR using PrimeXBT
PrimeXBT is a leading contracts-for-difference (CFD) broker, fully licensed and regulated by the FSCA, providing a comprehensive platform for trading across more than 100 popular markets, including CFDs on cryptocurrencies, forex, indices, commodities, and crypto futures.
With its upcoming launch in South Africa, PrimeXBT will enable local traders to access USDZAR trading, allowing them to leverage both domestic and international economic developments.
The broker will support popular local payment options, including Capitec Pay, facilitating easy deposits and withdrawals in ZAR for South African clients. It’s important to acknowledge that trading CFDs comes with risks; traders should adopt suitable risk management strategies and fully understand the potential risks before engaging.
Since its establishment in 2018, the PrimeXBT platform has swiftly expanded, catering to over a million trading clients in more than 150 countries.
To democratize the investing landscape, PrimeXBT reduces barriers to entry, offering accessible and secure opportunities in the financial markets, accompanied by superior trading conditions and innovative tools. Clients benefit from the reliability of trading with a reputable financial service provider dedicated to empowering traders while delivering value.
Matthew Hayward is a senior market analyst at PrimeXBT.
Learn more about PrimeXBT
Disclaimer: This content is solely for informational purposes and should not be interpreted as personal investment advice. It does not constitute an invitation or solicitation to engage in any financial transactions or investments. Past performance is not necessarily indicative of future results. The financial products offered by the Company are complex and carry a high risk of swift monetary loss due to leverage. Such products may not be suitable for all investors. Before trading, you should evaluate whether you comprehend how these leveraged products operate and whether you can afford the risk of losing your capital. The Company does not accept clients from Restricted Jurisdictions as specified on our website.
PrimeXBT (PTY) LTD (formerly Stack Advisory (PTY) LTD) is a licensed financial services provider in South Africa, holding license number 45697. PrimeXBT (PTY) LTD operates as an intermediary between investors and market makers, who are the counterparty for the products acquired through PrimeXBT.
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