The U.S. dollar (USD) / South African rand (ZAR) exchange rate (ticker symbol: USDZAR) has become one of the most popular exotic currency pairs among global forex traders. The USDZAR is considered an exotic forex pair because it is made up of a major currency, the USD, paired with the currency of South Africa, an emerging and smaller economy. Despite this, South Africa has the largest economy in Africa, and its currency offers investors a chance to taste a slice of the continent that has been touted as the next frontier of economic growth and global capitalism.
The USDZAR currency pair offers a wide range of trading opportunities, and understanding the two markets behind this pair is vital for trading success.
The ZAR – Brief Currency Outlook
The ZAR or the South African rand is the official currency of South Africa. In 1961, the South African pound was replaced by the ZAR, a currency issued by the South African Reserve Bank. Interestingly, the South African rand is also the legal tender in the Common Monetary Area that includes South Africa, Lesotho, Namibia and Swaziland. These countries also have their own currencies, pegged at par with the rand.
- The South African rand is denoted by upper-case ‘R.’
- The ISO code of the South African rand is ZAR, which is an acronym for the Dutch words “Zuid-Afrikaanse rand” or South African rand.
- The word ‘rand’ comes from the word ‘Witwatersrand,’ which means ‘white waters ridge’ in English. This refers to the ridge upon which the city of Johannesburg is built, which is well known for its gold deposits.
- As of May 2019, there are 5 different denominations for banknotes in circulation, and these include 10, 20, 50, 100 and 200 rand notes.
The USD – Brief Currency Outlook
The U.S. dollar is the official currency of the United States of America. The currency is issued by the country’s central bank, the Federal Reserve Bank, which is most commonly known as the Fed. The USD is the world’s primary reserve currency, and it is also the most widely traded currency in the world.
- The dollar sign, $, is used to denote the USD dollar. This symbol can have one or two vertical strokes, and the dollar sign usually appears to the left of the amount, for example, “$50”.
- The dollar is divided into 100 cent units.
- In 1862, the U.S. Department of the Treasury first issued paper U.S. currency in order to finance the Civil War and to make up for the shortage of coins.
- The USD is used as a standard payment unit in many commodity markets, such as crude oil and gold trading markets.
Origins and History – USD and ZAR
Historical Notes on the USD
The U.S. dollar (USD) is the world’s most held currency, both in reserve and circulation. It is the official currency of the United States of America and its territories, and it is issued and backed by the US Federal Reserve Bank. The USD is the de facto global currency, making up over 62% of all central banks’ foreign cash reserves. It is the main denominator of international trade, and almost 100 countries peg their currencies to the USD. The US dollar is truly King!
The USD was officially adopted as a unit of money in 1785, but it is the adoption of the 1944 Bretton Woods monetary system that catapulted the currency into its current status. Before that, most nations had their currencies pegged to the gold standard. However, because the United States had the largest gold reserves in the world, at that time, it was agreed that the signatory nations to the Bretton Woods agreement would peg their currencies to the USD instead of to the precious metal.
In the early 1970s, the United States unpegged the USD from gold, and by the time the Bretton Woods system was abolished in 1971, the USD had become the most dominant global reserve currency. During the early 1970s and 1980s, the USD experienced some inflation, but it always recovered from each decline, further cementing its place as the most stable currency in the world, a status it enjoys to date.
Historical Notes on the ZAR
In its early days, the ZAR was indexed to the British pound sterling (GBP), and the U.S. dollar (USD), and the country’s solid position as a major commodity exporter ensured that its national currency would maintain strength over others. But this would not last, as there was sustained international pressure in the early 1980s for the country to abandon the Apartheid policy that segregated the local black population.
The ZAR would then fall to achieve USD parity in 1982, and it continued to weaken even further until around 1986, when it was worth around 0.5USD. The Apartheid policy was abolished in 1992, and the ZAR stabilised and strengthened, following the election of Nelson Mandela as the first universally elected president in the country. Political temperatures weighed down in 1996, when the country went into election mode again and headlines of the country’s existing account deficit and inflation concerns started circulating. The ZAR started posting a recovery from 2001, but it would be pressured lower again from 2017 when the Eskom electricity crisis and concerns over a slowdown in China, the country’s largest trading partner, came to light. To put this into perspective, as of November 2021, the ZAR was trading at 14.95 to the USD. This means that in order to buy 1 USD, it would cost you 14.95 Rands. This is a long way from the value of 1 rand to 1.40 USD it enjoyed in 1961.
Why Trade the USDZAR? – The Correlation Between the USD and ZAR
The USDZAR might be an exotic currency pair characterised by high volatility, but South Africa is not just another emerging economy. It is the 31st largest economy in terms of GDP and boasts a diversified industrial sector and well-developed infrastructure. As of May 2019, the ZAR ranks as the 18th most traded currency in the world, and it accounts for 1.1% of daily trading volume, despite South Africa accounting for only 0.3% of daily forex turnover. South Africa is a global leader in the production of major commodities, such as gold, platinum, diamonds and chromium. This has rubberstamped the ZAR as an influential global currency thanks to its significance in the commodity sector.
Commodities, such as gold and diamonds, are denominated in dollars in the global market, which makes the USDZAR an interesting exotic currency pair. The fluctuations in the gold and diamond markets have an impact on the ZAR’s value, as is the case with other commodity currencies, such as the Australian dollar (metals) and the Canadian dollar (oil). As a currency of an emerging nation, the ZAR tends to weaken when investors flock to safe-haven currencies, such as the USD and the Japanese yen (JPY).
In recent times, the advent of cryptocurrencies has brought forth an interesting correlation, whereby cryptocurrencies are becoming a hedge against fiat currency devaluations. Traditionally, this is what gold represented over the years. Whenever there was currency turmoil, the price of gold would rise. Cryptocurrencies now aim to appropriate that role in the digital age, but they have been so far bedeviled by high volatility. Gold is still firmly in charge as a guard against inflation and has even developed a negative correlation with cryptocurrencies in recent times. As such, when gold prices rise, the ZAR appreciates as well; but cryptocurrencies are also depressed. Notwithstanding, cryptocurrencies are still in their early stages of price discovery, and it would be interesting to see if they will correlate with the ZAR going forward.
Trading Opportunities – Why Trade the USDZAR?
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