How to Trade Euro vs South African Rand (ZAR)?
The Euro is one of the most traded currencies in the world. The South African Rand is the most-traded African currency in the world.
With that in mind regarding economic global, trends, Africa is now on the rise. South Africa is about to host the BRICS summit in August 2023 and the world’s attention will be on the country as well as the African continent.
As traders, it may be a good idea to stay on top of the price action of the Rand. In this article, we will discuss how to trade Euro vs South African Rand.
Current Economic Situation In South Africa
As of August 2023, South Africa’s economy is undergoing a tough time. The country is the most industrialized nation on the African continent. However, its GDP fell 1.3% in March 2023 and there were regular power cuts in the country every day.
South Africa’s GDP has almost stayed flat since the end of 2019. During those 4 years, the country’s population grew by around 3.5%. Power cuts force businesses to either shut down or use expensive diesel to power generators, increasing operating costs.
Volatility in commodity prices isn’t helping either. Unemployment in June was north of 32% which is quite high and raises the risk of social unrest. Public debt is also at high levels.
While there are multiple negatives impacting the South African economy at this moment, there are strengths that offer optimism about the future. South Africa is one of only eight African countries that have achieved an upper-middle-income status.
Besides resource extraction, South Africa’s relatively diversified economy also has a strong service component. The financial services industry is an important contributor to the country’s economy. South Africa also has a sizable automotive manufacturing industry. South Africa is also one of the most popular tourist destinations on the African continent.
South Africa Trade
South Africa’s trade performance has a significant impact on its currency. Any trade surplus increases make the South African Rand stronger. Any wide trade deficits make the currency weaker versus other major currencies like the US Dollar or the Euro.
The US is a major export destination for South African businesses. The African Growth and Opportunity Act is a US law that allows duty-free terms to certain African countries. South Africa benefits from this law. However, South Africa is also caught in a wider geopolitical battle between the US, Russia, and China.
South Africa has been attempting to diversify its exports to countries like China and Russia. However, it may face action from the US if a delicate balance isn’t maintained which could lead to negative trade performance.
Such threats have in the past led to the South African Rand falling and government bonds being sold off. The African Growth and Opportunity Act is up for renewal in 2025. So, the next couple of years are critical for the South African economy and its government.
The geopolitical fallout isn’t limited to just manufacturing. South Africa’s status as a financial center of Africa is also susceptible to geopolitics as the country was recently placed on the grey list for failing to adequately tackle financial crimes.
South Africa is hosting the BRICS leaders summit in August 2023 and there have been media reports of the country wanting to trade less in the US dollar. Such moves can have implications for South Africa’s trade as well as its economy.
South Africa’s relations with Russia are also complex. South Africa, being a signatory of the Rome statute of the International Criminal Court, is obligated to arrest Russian leader Vladimir Putin. Therefore, Putin will not attend the BRICS summit in person.
The Price Action of Euro vs Rand
The Euro-Rand exchange rate was around 5 ZAR for a Euro back in 1996. That number in 2023 is north of 20. So, the overall trend has been the steady depreciation of the ZAR versus the Euro.
This long-term trend seems logical as South Africa has been a developing economy with a higher rate of inflation than a stable and mature market like Europe. In fact, most emerging economies have seen their currencies depreciate over time versus developed economy currencies.
The past 5 years have been quite volatile for the ZAR. The exchange rate versus the Euro has swung between 15 and 20 at least twice. The most recent trend has been a move from around 16 in mid-2022 to over 20 in mid-2023.
The current exchange rate of 20.7 ZAR for a Euro is close to historical resistance or peak levels. So, there could be a reversal which would mean that the Rand becomes stronger. However, a breakout from the 20-ish resistance level might lead the exchange rate higher and the South African Rand could depreciate further.
The support level appears to be around 19.75 while the next resistance could be the previous peak of 21.33 achieved in May 2023. The 50 and 18-day exponential moving averages are above the 200-day moving average. So, the overall trend is still up and in the longer term, the South African Rand is likely to continue depreciating versus the Euro.
Probable Trading Strategies For Euro vs Rand
If you believe that the uptrend is likely to hold and sustain, then you may want to go long EUR/ZAR. This effectively means that you sell ZAR to buy EUR. Trading forex is like trading a ratio.
If you are long a ratio, you want the numerator to go up and the denominator to go down. That would be the ideal scenario. However, what makes you a profit is the numerator going up RELATIVE to the denominator.
That means the numerator goes up while the denominator stays the same. Or the numerator staying rangebound while the denominator falls. If you think that the EUR/ZAR exchange rate will fall, then you would go short.
Going short may be the preferred trade for those who believe that the EUR/ZAR exchange rate has hit a resistance zone and it won’t break out from that level. A stop loss above the resistance zone can be used to manage risk in case the thesis does not play out.
For traders going long, one of the moving averages can be a stop loss level. Whatever trade you take, it is important to manage risk.
Conclusion and Risk Management
We will conclude the article with some key points about managing risk. Trading forex can be risky. Do not be carried away by the fact that the exchange rate moves only a few decimal points. The actual profit and loss can be much larger because a lot size has a large volume.
Managing risk means not losing your trading capital. It means losing as little as possible when the tide turns. Limiting your position size and defining the risk using stop losses are some steps that you should consider.
We hope that you have a better idea of how to trade Euro vs South African Rand. We covered some aspects of the South African economy and also talked about possible trading strategies that could be employed. We also provided a picture of the most recent price action.
We hope that this insight will help you better trade the Euro vs South African Rand.