The South African rand continues to weaken against the U.S. dollar after Moody’s downgraded the country’s last investment-grade rating to “junk”.
The announcement sent the South African rand (ZAR) to an all-time low of below 18 to the U.S. dollar (USD).
Moody’s, the rating agency, cited structurally weak growth, limited capacity to stimulate the economy and an “inexorable rise” in government debt over the medium term as key reasons for the downgrade.The result of this downgrade will now require South African bonds to be removed from indexes used worldwide to track investment-grade debt.
For example, later this month, the downgrade will trigger South Africa’s exclusion from the FTSE World Government Bond Index (WGBI).
The index includes 14 currencies, including the U.S. dollar, Japanese yen, and euro, and is tracked by around $3 trillion of funds.Passive funds following the WGBI will be forced to sell their rand bonds once they’re excluded. South Africa has a 0.45% weighting in the main index, suggesting there could be roughly $14 billion of money holding South African government bonds
And if things weren’t bad enough, as a result of this downgrade, big South African banks’ credit ratings were downgraded to junk.
Bond issuers are evaluated by rating agencies to assess their creditworthiness. There are three main rating agencies that evaluate the creditworthiness of bonds: Moody’s, Standard & Poor’s, and Fitch. Creditworthiness is defined as the bond issuer’s financial ability to make interest payments and repay the loan in full at maturity. The rating agency’s opinion of this creditworthiness is what determines the bond’s rating. Each agency has a hierarchy of ratings to help investors assess that bond’s credit quality compared to other bonds. Bonds with the lowest ratings are considered “speculative” and often referred to as “junk” bonds.
And it gets even worse for South Africa.
Since this Tuesday, two more people have died from COVID-19, bringing the total number to five, with at least 1,353 infected.
In an attempt to prevent the exponential spread of coronaviruses cases seen in Europe and the U.S., the country is under a three-week lockdown ordered by President Cyril Ramaphosa.
In his announcement of the lockdown, President Ramaphosa conceded that the country would pay a heavy economic price for such an extreme step.
With this continued economic uncertainty for South Africa, I see the rand weakening further against the U.S. dollar and will remain in my trade.
As you can see on the daily (1D) chart, USD/ZAR paused for a bit last week but has now resumed its uptrend.
At the time of writing, USD/ZAR is at 18.2225.
So unrealized profit is currently at 16,725 pips (18.2225 – 16.5500).I will move my stop to 17.1500.
This is right below the most recent swing low
This allows me to lock in 6,000 pips or a 3.6% gain (17.1500 – 16.5500).
I will also continue to use the ROC as a trailing stop function.
For now, I have no predetermined profit target. But this may change depending on how price action goes.
Since USD/ZAR is hitting all-time highs, there is no overhead resistance so the sky’s the limit.
I will try to ride this uptrend for as long as possible.
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