2019 saw the South African rand (ZAR) become the most traded currency in Africa. While this was no surprise – despite the increase in trading in places like Kenya and Nigeria – the rand continues to prove its power on the world stage.
Indeed, the rand became the 18th most traded currency in the world at the close of 2019. Not only does this help to solidify the rand’s position in terms of Africa’s economies, but it also helps South Africa show its economic viability on a wider scale.
So, what can we expect from the rand in 2020?
Financial services group Absa published research that suggests that the rand could weaken slightly in the first quarter of 2020, while reaching R16.3 against the dollar by the end of the year.
The reasons for this are that local and international political events will have an impact on the volatility the rand will experience. The IMF (International Monetary Fund) projected a 0.8% growth in 2020 for South Africa, suggesting that fiscal strain would bring the figure down lower than previously expected.
However, the ZAR looks to be resilient, especially if the other important currencies continue to teeter on the brink of various trade wars and other tensions that could devalue them and provide a volatile backdrop to currency valuations.
Favorable trade deals could, therefore, boost and strengthen the rand, especially as international investors are seeing the benefits of investing in the South African economy.
The forecasted growth appears to increase by 2021, suggesting that 2020 could be a year of important maneuvers by the rand.
South African public utility Eskom has been the main cause of such disappointing figures for 2020 as the company’s operational questions present a risk to their finances and, therefore, to the growth of the economy of the whole of South Africa.
If these issues are remedied efficiently, South Africa’s economy could see a boost which will take the rand with it.
Trading Power of the Rand
The forex industry in South Africa is growing. There are an estimated 190,000 traders in the country alone, and a growing demand can be seen among investors, brokers, and in the regulated finance sector itself.
The strong regulation in the financial sector has allowed forex trading to grow in South Africa at both a local and national level. The rand’s power has attracted investors, which contributes to how well the forex market is operating in the region.
South Africa’s trading volume in 2019 averaged around $2.21 bn daily and $20.37 bn throughout the year. Contrast this to India’s $39 bn and Brazil’s $18.7 bn and it’s clear that South Africa’s currency and trading credentials are in the middle of the BRIC countries.
The rand is, therefore, becoming increasingly popular when used in a currency pair. When trading USD/ZAR, the oft-volatile fluctuations result in investors benefitting, so this exotic trading pair is becoming more popular.
This will likely lead to more people beginning trading journeys, with newcomers to the market being able to compare forex brokers easily to specialize in trading niche currency pairs such as the USD/ZAR where pre-existing market knowledge may be lacking.
Shockwaves in South Africa?
Danish bankers Saxo Bank publish an annual set of forecasts that will send ‘shockwaves’ through the markets. For 2020, they have speculated that the rand will hit R20 to the dollar as the world cuts credit lines with South Africa.
While these predictions are designed to be fairly outrageous (the UK nominal growth will hit 8% and Hungary will leave the EU), could there be a kernel of truth in them?
South Africa’s foreign investment has grown year-on-year. September 2019 saw an increase of $1.2 bn of foreign investment. Indeed, trade summits between the UK (keen to branch out and make trade deals outside of the EU) and South Africa have been ongoing throughout January 2020 and could result in further investment in the economy.
The UK remains South Africa’s second-largest investor, and a possible trade deal could see the investment amount increasing. So, there is a possibility that South Africa could continue its upward trajectory when it comes to external investors in its economy, which would further improve the rand as a viable currency.
The rand is in an interesting position and one that economists will no doubt continue to inspect more closely as 2020 draws on.
The financial position it finds itself in is heavily tied to South Africa’s economy, so any volatility felt there – such as with Eskom – will reflect in the valuation of the rand.
The rand’s position as a currency trading pair is growing, especially as other currencies face greater threats based on political ramifications and international tensions.
The rand looks set for an interesting year and one that could prove just how powerful it is in the eyes of the world.