Q2 GDP growth of 0.6% strengthens Rand

The South African economy was in shambles in the first-quarter of 2016. The economy shrank 0.10% y-o-y. The currency lost more than 30% of its value in the past 18 months. The exchange rate of Rand fell to $0.0639, which was half of what it was five years back. The unemployment rate shot above 25%. The rating agencies just stopped short of downgrading the country’s debt to junk status.

The hostile relationship between the President Jacob Zuma and Finance Minister Pravin Gordhan also kept the investors at bay. While the South Africa was in chaos, the investors around the world anticipated the UK to vote in favour of staying with the EU. The optimism kept the Euro strong against the South African Rand.

However, following the unexpected outcome of the Brexit referendum, the Euro started declining against the South African Rand. From a high of 17.93560, the EUR/ZAR pair slipped to a low of 14.74720. However, mixed economic data from the EU and uncertainty in the US Fed rate hike enabled the Euro to recover to 16.46450 against the Rand. Now, the Euro has once again started to decline.

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We believe that the EUR/ZAR downtrend will continue in the weeks to come due to the following reasons.

The South African economy recorded an economic expansion of 0.6% y-o-y in the second-quarter of 2016. The reported GDP growth was 0.1% higher than the analysts’ expectation of 0.5% growth. Considering the fact that the economy contracted in the first-quarter of 2016, this is certainly positive news. On a seasonally adjusted annualized basis, the South African economy grew 3.3%, compared to a contraction of 1.2% in the prior period. The reported growth is the highest in the past 18 months. A recovery in the mining and manufacturing sector has put the country back on the growth path.

On the other hand, the Euro zone reported a mere 0.3% increase in the economic activity in the quarter ended June 2016. During the previous quarter, the Euro zone had recorded a GDP growth of 0.5%. Furthermore, the analysts are still unsure of the time period required by the EU to recover from the negative impact caused by the UK’s exit.

This uncertainty continues to act as a drag on the Euro dollar. Thus, we anticipate the Rand to strengthen further against the Euro in the weeks ahead.

The EUR/ZAR currency pair has broken below the support level of 15.80. Both the main and signal lines of the MACD indicator are declining below the zero line. Thus, we can expect the currency pair to slide to the next support level of 15.34.

Taking this into consideration, a currency trader can go short in the EUR/ZAR pair near 15.80. The short position can be covered near 15.40. To minimize risk, a stop loss order can be placed above 16. The risk to reward ratio for the recommended short position is 1:2.

Buying a one touch put option would enable a binary trader to capitalize on the EUR/ZAR’s decline. The target level for the put option should be 15.40 or higher. The contract should remain valid for at least one month from the time of purchase.

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