Rand recovery catches traders
SHORT TERM: MORE GAINS IN STORE
TD Securities opts out of wrong-way bet as momentum shifts.
The rand’s rapid turnaround from April’s record low has already burnt some traders’ fingers. There may be more victims, judging by the discrepancy between forecasts for the currency and its actual level.
TD Securities’ long-dollar-rand trade, opened on 21 May at R17.92 per dollar, was stopped out just eight days later when the currency strengthened below 17.45, handing the position a 2.6% loss. The trade was entered on expectations that easing by the South African Reserve Bank would hurt the attractiveness of the currency – but the opposite happened.
The bearish predictions were not limited to TD. Analysts in a Bloomberg survey see the rand reaching 18.95 per dollar in the second quarter – implying a decline of around 8% from Friday’s level of 17.50.
The probability of the rand weakening that much by the end of June is less than 10%, according to Bloomberg’s forecast model based on prices of options to buy and sell the currency.
In the context of rising US-China tensions over security legislation in Hong Kong, along with a deteriorating economic picture in SA, the timing of the rand’s rebound “has been a bit surprising,” said Per Hammarlund, chief emerging markets strategist at SEB AB in Stockholm.
Still, “given that the rand and most other emerging-market currencies have some way to go before being back at levels from before the Covid-19 outbreak, the rally has enough legs to last through the end of the second quarter”, he said.
The rand has strengthened 5.6% in May, it’s first monthly advance this year and the best since January 2019. On the way, it breached two key resistance levels to further gains: the 50-day moving average at around 18.20 and the 23.6% Fibonacci retracement from April’s record low, at 18.04.
Next up is the 38.2 retracement at 17.24, and a sustained breach could see the currency heading toward 16.50 per dollar, according to Credit Suisse and Standard Bank Group.
While a tentative return of risk appetite worldwide contributed to the rand’s advance, the currency also received support from a relatively hawkish central bank.
The regulator on 21 May curbed expectations for further aggressive easing after cutting its benchmark interest rate for the fourth time in as many months in a bid to support an economy forecast to slump deeper into recession.
Also bolstering the currency were signs that record outflows from SA’s domestic bond market may be coming to an end. Foreign investors started trickling back into local debt in the second half of May, after selling a net R66 billion this year.
After returning 6.2% in May for investors who borrow dollars to buy high-yielding currencies, known as the carry trade, the rand’s one-month volatility-adjusted implied yield has climbed to the highest in nearly two months. That suggests more rewards may be in store for investors willing to risk buying one of the emerging world’s most volatile currencies.
Still, there are risks ahead. Rising tensions between the US and China could spill over into emerging markets, while South Africa’s economy has yet to show the full hit of the coronavirus lockdown. – Bloomberg