Dollar Rebound Signals Rocky Road for South Africa’s Rand
With the dollar heading into what is traditionally its best month of the year, the outlook for South Africa’s rand has taken a turn for the worse.
The world’s second-most volatile currency has weakened during August in four of the past five years, for an average decline of 5.3%, according to data compiled by Bloomberg. The dollar, by contrast, has gained on average 0.4% in August against a basket of peers.
That spells trouble for the rand, which slumped as much as 1.6% on Monday in a fifth straight day of declines, the longest losing streak since February. According to trading data and technical indicators, that may just be the beginning.
Options traders are hedging against wider rand swings, with a bias toward weakness. One-month implied volatility for the rand versus the dollar climbed to a six-week high on Monday. The premium of contracts to sell the currency over those to buy it, known as the 25 delta risk reversal, widened to 225 basis points, the most since June 26.
Futures traders are also becoming less bullish. Net speculative long-rand contracts fell for a second week in the five days through July 28 to the lowest level in almost two months, Commodity Futures Trading Commission data show.
Analysts have stayed reasonably bullish on the rand since the Covid-19 meltdown in mid-March. But the spot-market rate has now weakened beyond the median forecast, and also breached the 50-day moving average, which in the past tended to augur further declines. The probability of the rand weakening beyond the median forecast of 17 per dollar is 58%, compared with 50% a month ago, according to Bloomberg’s forecast model based on options pricing.
Some of the highest yields in emerging markets haven’t been sufficient to stop the bleeding in the nation’s debt markets. Non-residents have reduced their holdings of government securities to the lowest level in more than eight years after selling a net 54 billion rand ($3.1 billion) of the debt this year. If a 10-year yield above 9% didn’t offer enough of a premium at a time when the rand was strengthening against the dollar, it’s hard to see what will entice investors back into the market.
©2020 Bloomberg L.P.