The South African rand is one of the currencies you may not often hear about. This is logical because the South African rand is not as famous as larger currencies like the US dollar and pound sterling. However, some foreign exchange traders tend to include them in their trading portfolios, attempting to take advantage of their value fluctuations.

This article aims to provide you with valuable insights about the South African rand and the South African economy, which you may want to consider when conducting market research.

Understanding the Fundamentals of South African Rand

The South African rand is the official currency of the Southern African Common Currency Area, which includes South Africa, Namibia, Lesotho, and Eswatini. Rand means "ridge" in Dutch and Afrikaans. If you want to know what the relationship between the mountain ridge and Rand is, you may not know that the largest gold mine in South Africa was discovered on the mountain ridge where the city of Johannesburg is located.

The South African rand was introduced in 1961. Over the next 25 years, South Africa's currency suffered from the economic consequences of high inflation data and severe international economic sanctions. In mid-1985, the government was even forced to suspend foreign exchange trading for several days to prevent its rapid depreciation.

Due to high inflation, budget deficits, and problematic energy supply putting pressure on the economy, it is not easy for the South African rand to strengthen against major currencies. However, South Africa is seen as an emerging market economy that provides investment opportunities. A World Bank report states that South Africa has managed to recover most of its lost gross domestic product due to the coronavirus pandemic. In the past few years, authorities have shifted to investing in renewable energy and announced new attractive incentives.

South African economy: mining industry is one of its pillars

South Africa's economy is the third largest in Africa, after Nigeria and Egypt. South Africa's economy is the most industrialized on the African continent. South Africa is famous for its rapidly developing mining industry.

A survey released by Boston Consulting Group pointed out that the country's mining industry contributes 8% of GDP and provides direct employment opportunities for nearly 500000 people.

Another report from the University of Witwatersrand in Johannesburg states that "South Africa has ore reserves worth over $2.5 trillion, with 16 commodities ranking in the top 10 internationally. South Africa has the world's largest known reserves of platinum group metals (PGMs; 88%), manganese (80%), chromite (72%), and gold (13%). It ranks second among titanium minerals (10%), zirconium (25%), vanadium (32%), vermiculite (40%), and fluorite (17%)

The Reserve Bank of South Africa tightens policies, leading to a weakening of the rand

The Reserve Bank of South Africa (SARB) has raised interest rates multiple times in the past 18 months, tracking the measures taken by major central banks to stabilize inflation. The overall annual consumer inflation rate slowed to 6.8% in April from 7.1% in March. According to a report released by the South African Bureau of Statistics, the figures for April were the lowest in 11 months.

SARB raised interest rates again on May 25th

On May 25th, the SARB Monetary Policy Committee raised borrowing costs by 50 basis points, exceeding the expected 25 basis point interest rate hike. The interest rate has reached its highest level since April 2009.

The SARB Management Committee stated in its post meeting statement that "overall inflation is expected to remain above the upper limit of the inflation target range until the third quarter of this year, and will not sustainably recover to the midpoint of the target range until the second quarter of 2025

SARB policy makers predict GDP growth rates of 1.0% and 1.1% in 2024 and 2025, respectively. This year, the board of directors still expects a GDP growth rate of 0.3%.

Has the South African rand received a vote of trust from analysts?

The South African rand fell on May 10, hitting a three-year low against the US dollar, and international and domestic treasury bond also fell. As winter approaches in the southern hemisphere, concerns about scheduled power outages (known as load shedding) intensify, leaving investors and traders feeling uncertain.

Analysts from Commerzbank AG say that despite the aggressive monetary policy implemented by the South African Reserve Bank, the South African rand may continue to decline. "Rand has been affected by the risk aversion environment. At present, it is mainly the US debt debate and persistent domestic problems. The list of these problems is very long, including the energy crisis, poor growth prospects, high unemployment rate and problematic foreign policy decisions. This is the responsibility of the government," they pointed out in the report.

Goldman Sachs emerging market experts wrote in a report on the South African economy, Concerns about more load shedding and the impact on already weak growth prospects have increased. Due to the high inflation rate and the surprising rise even in low growth, SARB faces a difficult trade-off, which may be more limited in providing interest rate hikes to anchor expectations and support sharp currency depreciation

Beginner's South African Rand Trading

The South African rand is one of the most traded currencies on the African continent. Currency pairs such as the rand against the US dollar or the rand against the pound are included in the investment portfolio of traders who wish to leverage the volatility of the rand. Nevertheless, currency trading carries risks for all traders, whether they are beginners or experienced individuals.

One way to reduce trading risk is to upgrade your trading knowledge. Trading is not just about speed, instincts, and a thorough understanding of the market. At the moment you start trading, your funds are at risk. However, you can use risk management tools, and you should be able to use them when necessary.

How can you learn to use them? This is simple because many foreign exchange brokers provide comprehensive educational materials, including foreign exchange trading courses, foreign exchange online seminars and seminars, e-books, and other useful content. Take this opportunity to learn the basics of trading and minimize stress and anxiety while enjoying the trading experience.