Dollar rebound signals rocky road ahead for SA’s rand

Options traders are hedging against wider rand swings, with a bias toward weakness.
Image: Waldo Swiegers/Bloomberg

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. The currency is already in the midst of its longest losing streak since February. According to trading data and technical indicators, that may just be the beginning.

Bearish bets

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.

Uncertain future

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.

Forecasts trailing

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 ending the year at the median forecast of 17 per dollar is 43%, according to Bloomberg’s forecast model based on options pricing.

Bond Outflows

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 R54 billion ($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

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Thought ZAR was under valued according to the SA Asset Management Industrial Complex

The Rand is the Zim Dollar in waiting!

You have a government that will carry on to increase wealth tax, municipal taxes, airport taxes, fuel taxes, toll gates, electricity taxes, water taxes, etc… All to carry on the gravy train growing bigger and going faster. The sad things is that people keep buying expensive cars, keep putting themselves in debt ( PUSH BY THE BANKS THEMSELVES! …oh, the interest are so low, get a loan for a new house, a new car, etc…), keep shopping like crazy. The outcome is there: straight into extreme poverty in the coming years. Because more crisis are looming. Water shortages, lack of electricity, food prices going through the roof , crop failures, cost of medical care spiraling out of control….

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