Rand re­mains very sen­si­tive cur­rency

The Star Early Edition - - BUSINESS NEWS - Robert Brand

SOUTH Africa’s rand has held up re­mark­ably well this quar­ter, con­sid­er­ing the head­winds: an econ­omy in re­ces­sion, credit rat­ings re­duced to junk, a govern­ment mired in al­le­ga­tions of cor­rup­tion and a rul­ing party dis­tracted by a power strug­gle.

It won’t last, say Cit­i­group and Mor­gan Stan­ley.

The rand has gained 2.5 per­cent against the dol­lar since the end of March as the coun­try’s rel­a­tively high yields con­tin­ued to at­tract buy­ers. South African 10-year govern­ment bonds yield 8.76 per­cent, sec­ond only to Tur­key among 28 de­vel­op­ing na­tions tracked. That’s handed in­vestors a carry trade re­turn of 4.1 per­cent. But the rand’s pre­dicted re­turn for the next quar­ter, based on fore­casts for the cur­rency plus in­ter­est rates, was a neg­a­tive 2.1 per­cent on Thurs­day, worse than all but three emerg­ing-mar­ket peers.

“Over the past few weeks, we have seen the rand’s run of out­per­for­mance grad­u­ally grind to a halt, and we think it will con­tinue,” Mor­gan Stan­ley strate­gists, in­clud­ing Gor­dian Ke­men, wrote on Thurs­day. “This un­der­per­for­mance is the re­sult of the cu­mu­la­tive ef­fect of a string of eco­nomic and po­lit­i­cal dif­fi­cul­ties that have hit South Africa re­cently. These set­backs may mark a turn­ing point on sen­ti­ment around the rand.”

The bond mar­ket is al­ready show­ing cracks as pol­icy mak­ers from the Euro­pean Cen­tral Bank to the Bank of Eng­land pre­pare to fol­low the Fed­eral Re­serve in tight­en­ing pol­icy over the com­ing months, clos­ing the tap on the flood of money flow­ing into emerg­ing mar­kets, in­clud­ing South Africa.

On Wed­nes­day, foreign in­vestors dumped the most South African bonds since Don­ald Trump’s elec­tion as US pres­i­dent in Novem­ber sparked an emerg­ing-mar­ket sell-off. In­vestors sold a net R4.5 bil­lion of rand se­cu­ri­ties, bring­ing av­er­age daily out­flows in the past month to R52 million. The coun­try de­pends on port­fo­lio flows to fi­nance a cur­rent-ac­count deficit that has swollen from 1.7 per­cent to 2.1 per­cent of gross do­mes­tic prod­uct in the first quar­ter.

“The po­ten­tial ad­just­ment in the fixed-in­come mar­kets may up­set higher-yield­ing flows in emerg­ing mar­kets,” Cit­i­group strate­gists Luis Costa and Toller Hao wrote on Wed­nes­day. Cit­i­group closed its short dol­lar-rand po­si­tions and down­graded South African bonds to mar­ket weight from over­weight. “The rand re­mains a very sen­si­tive cur­rency rel­a­tive to fluc­tu­a­tions in port­fo­lio flows.”

Bear­ish bets are stack­ing up. The pre­mium of op­tions con­tracts to sell the rand ver­sus those to buy it over the next three months climbed 40 ba­sis points in the past month to 3.1 per­cent­age points, the high­est since April and the most out of 21 emerg­ing-mar­ket cur­ren­cies bar­ring Rus­sia’s rou­ble.

Most de­vel­op­ing-na­tion cur­ren­cies will con­tinue to do well as the dol­lar fal­ters and risk ap­petite re­mains firm, ac­cord­ing to Mor­gan Stan­ley. But South Africa’s weak econ­omy and po­lit­i­cal risk make the rand vul­ner­a­ble.

“We ex­pect emerg­ing mar­kets to ride out any ad­di­tional volatil­ity created by a repric­ing of cen­tral bank mon­e­tary pol­icy in the de­vel­oped world,” the Mor­gan Stan­ley strate­gists wrote. “South Africa is an im­por­tant ex­cep­tion.” – Bloomberg

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