Contrary currency play
THIS exchange-traded note (ETN) issued by Absa tracks the rand/dollar exchange rate. With no gearing it moves in sync with the currency, moving higher as the rand weakens.
Recent rand weakness has generated all sorts of talk of the currency blowing out, but every time it heads out above R10 we see it strengthen, suggesting that the bias above R10 is to buy rand and sell dollars, leading to R/$ strength.
While much of the rand weakness has been of our own making, we’ve also seen other emerging-market and commodity currencies weaken on concerns of slower Chinese growth, leading to weaker commodity demand and more investor demand for the more traditional stock markets like US rather than emerging markets. However, Chinese growth remains in place and off a much higher base than a couple of years back and demand for yield from emerging markets will not disappear. Coupled with a rand that is not comfortable above R10/$, we expect further rand strength down to the mid or even low R9s as a minimum.