The South African Rand seems to be falling through the floor! The ZAR to USD exchange rate has collapsed to record-low levels. Sadly, it could go much lower; the plunge in currency value could continue.
Dismal Outlook for South African Rand
You see, for the ZAR/USD pairing to move to the upside, you want to see the South African economy improving. This is just not happening and conditions are only expected to get worse.
Looking at the big picture, in 2011, South Africa’s gross domestic product (GDP) increased by 3.21% from the previous year. In 2014, the growth rate for the second-biggest economy in Africa was just 1.52%. (Source: Federal Reserve Bank of St. Louis, last accessed January 12, 2016.) Put simply, the growth rate of South Africa halved between 2011 and 2014.
For 2015, the International Monetary Fund (IMF) forecasts that the economy will grow by just 1.39%, lower than in 2014. And the growth rate of more than three percent experienced in 2011 isn’t expected to return until 2020 at the earliest. (Source: International Monetary Fund, last accessed January 12, 2016.) Mind you, these are just forecasts and they tend to get revised. Don’t be surprised if the growth rates are much lower.
With the South African economy slowing down, could the ZAR to USD rate move to the upside? Highly unlikely.
South Africa’s economy isn’t the only factor affecting the ZAR/USD exchange rate. I am paying extra attention to the factors as well, one of the biggest being the divergence in the monetary policy in the U.S. and South Africa.
Just recently, the Federal Reserve increased its benchmark interest rates, a move that’s contrary to what’s happening at central banks around the world. The interest rates set by the Federal Reserve are expected to go higher as well.
When it comes to South Africa, its interest rates remain high. The repo rate at the South African Reserve Bank stands at 6.25%. Currently, there aren’t really any indications on what the central bank of the country wants to do, but it will not be surprising to see it lower these rates. You see, the general convention is to lower the rates to boost economic growth.
Lower rates could give another hit to the already plunging ZAR to USD currency exchange.
Charts Suggest Lower ZAR to USD Ahead
Look at the long-term chart of the ZAR to USD exchange rate.
Chart courtesy of www.StockCharts.com
As said earlier, the currency pair continues to plunge lower. The ZAR to USD pair trades near 0.06. This is a record-low territory for the currency. Remember: trends in the currency market remain for a long time. The rand could see much more downside.
The Bottom Line for ZAR to USD…
You see, just like how the Canadian dollar is highly correlated with oil, the South African rand is impacted by gold and platinum group metals (PGMs). These metals have been suppressed for a while, and until they move to the upside, there isn’t really any light at the end of the tunnel for the ZAR to USD pairing. A further crash shouldn’t be ruled out.