How to trade currency pairs on economic data releases
Currency pairs are quoted with a base currency and a quote currency. Take the USD/ZAR currency as a case in point. The first currency in the pair - the USD - is the base currency, and the second currency in the pair - the ZAR - is the quote currency. On 20 August 2017, the USD/ZAR pair (an exotic currency pair) was trading at 13.1462. This means that every $1 is worth the equivalent of R13.1462. Viewed in isolation, this figure gives us a comparative static, but nothing further. To understand a currency pair's valuation, we need to extrapolate over a period of time. In this particular case, the 52-week range of the USD/ZAR is 12.2981 on the low end and 14.7479 on the high-end.
22 Aug 2017 13:04
To put this into perspective, consider the value of a $1,000,000 investment from the US into South Africa. At the 52-week low, $1,000,000 would be the equivalent of R12.2981 million, and at a 52-week high, that same investment would be worth R14.7479 million. Clearly, US investors are in the ascendancy with this currency pair. The rand has deteriorated markedly against the USD since the early 2000s, and continues to trend bearish against the greenback. South Africans looking to invest their funds abroad will be able to purchase less per unit ZAR over time. But what determines how a currency pair is going to move?
Chief analyst, Blythe Penley from SnP investments
, stated the following: “Briefly speaking, any move to increase interest rates in South Africa, or the US will have a negative effect on the opposite currency. In other words, a rate hike in South Africa will strengthen the ZAR and weaken the USD/ZAR pair. A rate hike in the US will strengthen the USD/ZAR by strengthening the USD. Many other economic indicators weigh heavily on currency trading such as employment data in the US. This is known as NFP data (nonfarm payrolls) and when it increases, it attracts capital flows to the US. This strengthens the USD. Plunging NFP data or rising unemployment has the opposite effect.” South African economic factors to consider
US economic factors to consider
- South Africa is an emerging market economy. This means that it is inherently more volatile, less developed, and more susceptible to capital flight.
- South Africa has a poorly developed and crumbling infrastructure, with electricity (Eskom), roads and highways, schools and institutions, etc. The poorer the quality of a country’s infrastructure, the more it needs foreign direct investment. International investors may be disinclined to pour money into countries that have not adequately invested in their own development.
- Geopolitical uncertainty in the country has scared many investors away. President Jacob Zuma has survived eight motions of no confidence in his leadership, and remains in place.
- Credit ratings agencies have downgraded South Africa’s status over the years. These include Moody’s, Fitch, etc. When credit ratings agencies downgrade a country, this has a negative impact on international financing.
- Interest rates in the US look likely to remain at the current level 1.00% to 1.25% for the foreseeable future. There does not appear to be any move to hike interest rates at the next meeting on 20 September 2017, but a rate hike is likely on 13 December 2017. For the short term, the doves are not looking to pull the trigger on the federal funds rate.
- The political rancour in the US has reached fever-pitch levels with the Trump administration. The recent firing of Steve Bannon as White House chief strategist is a case in point. The Trump White House is looking increasingly like the Apprentice series with people getting fired, left, right and centre. This does not bode well for economic stability in the country and helps to weaken the USD.
- The dollar index is an important determinant of which way the USD is going to trade. It measures the greenback against a basket of currencies, including the GBP, JPY, CHF, CAD, EUR and SEK. This trade-weighted index is currently trading at 93.42 (August 20, 2017). For the year to date, the US dollar index is down 8.75%. This is telling when it comes to the USD’s performance against other currencies such as the GBP, JPY and EUR. However, the USD has not weakened considerably against the ZAR.