Signs That Traders Are Coming to Terms With Rand's New Normal

(Bloomberg) -- After years of being a one-way bet, South Africa’s rand seems to have turned a corner. The currency gained in 2017 after five straight years of losses, and extended the advance since January, riding a wave of optimism following the election of Cyril Ramaphosa as president.

These charts suggest that traders are starting to adapt to what may be the new normal for the South African currency.

The cost of hedging against rand weakness using currency options is falling. The premium of options to sell the rand versus those to buy it over the next six months dropped to the lowest in more than 10 years last week, indicating that traders are cutting bearish bets.

The number of open non-commercial short rand-dollar contracts is at the lowest since August, according to Commodity Futures Trading Commission data. Long-rand contracts outnumber shorts by more than 400 percent, the data show.

Analysts are scrambling to update their forecasts for the currency. As recently as December, the median prediction of analysts in Bloomberg surveys was for the rand to end 2018 at 14.50 per dollar. That’s come down to 12.30.

Foreigners can’t seem to get enough of South African assets. Inflows into the country’s stocks and bonds are running at a combined daily average of 916 million rand ($78 million), compared with 216 million rand last year. That suggests investors are becoming more comfortable with the currency risk.

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net.

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson

©2018 Bloomberg L.P.