Written by Asis Ghosh on behalf of iFOREX.
It is a new year and a new climate for global economies. The winds of change are upon us, and we are finally seeing economies around the world begin their recoveries from the disaster that was 2020.
The US is leading from the front, with outstanding first quarter results for the economy that sees the country’s GDP almost back to pre-pandemic levels. The Rand isn’t doing too badly either, recently hitting below R14 to the US Dollar and proving that it’s not down and out by any means. When it comes to economies, exchange rates and currency prices can be a good indicator of relative economic health.
Currency prices are heavily influenced by factors like economic recessions, inflation and interest rates, so they are essentially the window into a country’s economy for the world to see how stable or unstable it may be.
Let’s take a closer look at both the South African economy and the US economy to see how they are performing in 2021 so far, and what this could mean for the USD/ZAR currency trading pair. Keep reading to learn more about iFOREX and forex trading as CFDs.
Last year, the US economy fell into one of the deepest recessions it has ever seen amidst the Covid-19 pandemic devastation. However, recovery came swiftly in with the new year as during the first quarter of 2021, the US GDP grew by 1.6 percent, compared to the 1.1 percent growth experienced in the last quarter of 2020.
This takes the GDP almost back to what it was before the Covid-19 pandemic, which shoots the US into a frontrunner position for economic recovery. In fact, economic output across the vast country is expected to return to pre-pandemic levels by the Northern Hemisphere’s summer.
This recovery has come largely thanks to President Joe Biden’s huge fiscal stimulus package and the country’s speedy vaccination program, which has already inoculated a considerable portion of the population. Consumer spending increased by 2.6 percent in Q1 of 2021, with a 5.4 percent increase in goods purchasing, and a 1.1 percent increase on consumer spending on services.
Gregory Daco, chief U.S. economist at Oxford Economics, said: “Consumers are now back in the driver’s seat when it comes to economic activity, and that’s the way we like it,” suggesting the willingness of the people to get back to normal living and the spending that comes with it could be why the US economy is pushing back to normal so quickly.
The US has been flexing its economic muscles this year as corporations have also released favourable earnings recently, such as Amazon, which boasted a profit of over $8 billion last quarter. However, while the US economy is on a quick path to recovery, there are also a few obstacles along the way, which come in the form of shortages. From labour to semiconductors, these shortages could hamper the country’s economy from reaching its full potential.
As a result, the Dollar has been strong overall, with some sharp rallies, but recently it has slipped slightly below its earlier form.
South Africa has been hit hard by the pandemic and we are currently fearing a third wave of the virus, amidst slow vaccine distribution. Be that as it may, since the peak of the pandemic, the Rand has outperformed other emerging markets and gained a massive 30 percent against the Dollar.
In the beginning of May, the Rand broke through the R14 to the Dollar mark to trade at levels that haven’t been seen since January of 2020. The Rand’s strength can largely be attributed to the influx of funds into emerging markets over the course of the pandemic, and the developments with the ANC that have seen the ruling party take action against corruption.
Nedbank explained that the global appetite for risk, combined with the weaker Dollar, strong commodity prices and the positive fiscal performance in our country have led to the Rand going from strength to strength. Going forward, we face a third wave of the pandemic that could be mitigated by a ramping up of vaccination efforts, leading many to wonder how the Rand will react.
The USD/ZAR relationship
Last year at this time, the Rand was spiralling into disaster against the Dollar when it almost went above the R20 to the Dollar mark.
This year, however, the Rand has gained some serious ground, sitting at R14 to the Dollar as of mid-May. This was largely due to the stats released from the US which showed underwhelming job creation numbers and higher unemployment rates than they had expected, which gave other currencies an opening to strengthen against the Dollar while it fell.
The USD/ZAR began the year with a big uptick, and then slowly started to descend with a few peaks along the way, until it ultimately fell lower. The pair began the year on a closing price of 14.6636 on 3rd January, before it leapt up by 5.8 percent to land at 15.5212 just eight days later, on the 11th.
After that, the USD/ZAR pair dropped down to 14.4585 on 15th February, which was a 0.4 percent decline. The pair then went on another ride upwards to hit 15.5372 on 8th March, which was a 7.4 percent increase. However, it was short lived as the USD/ZAR pair came crashing down by 9.5% to close at a price of 14.0500 on 10th May.
In true forex fashion, it has been a wild ride for the currency trading pair so far this year.
iFOREX and forex trading as CFDs
The characteristic volatility of the forex market can provide both opportunities and risks for certain formed traders who invest in CFDs, or Contracts for Difference. CFDs allow you to take advantage of price movements in both directions—increases as well as decreases—of currency pairs such as USD/ZAR, without having to purchase the underlying asset (in this case any actual currency).
Essentially, you’re able to trade on volatility, so if you expected the price to increase, you’d open a ‘Buy’ deal or ‘Go long,’ whereas if you expected it to decrease, you’d open a ‘Sell’ deal or ‘Go short.’
Why it’s important to trade with a regulated broker
If you’re interested in entering the CFD forex trading market, your first move should be to find a regulated broker. This means they’re bound to certain high standards of conduct and quality, which provides both security and reliability for the client.
That’s why it’s important to trade with a regulated broker. One such regulated broker is iFOREX and forex trading as CFDs is just one of the many instruments on offer. You can choose from hundreds of CFD instruments including forex pairs like USD/ZAR, commodities, shares, global indices, ETFs, and cryptocurrencies.
Sign up today and take advantage of iFOREX’s educational intro pack, available to all clients at no extra cost.
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