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Just when you thought things couldn’t get worse for the South African rand … they probably can’t.
The currency fell to a record low against the dollar in April, shaken by a host of bad news: a growing fiscal gap and rising government debt; credit rating downgrades that leave the country deep in trash territory; expulsion of a major bond index followed by trillions of dollars of funds; and the implosion of the economy in the midst of a strict blockade of the coronavirus.
But there are signs that the bad news comes at a price, and the rand may be poised for a rebound as emerging markets recover from the devastation of the coronavirus pandemic. These tables show why.
Moderate volatility
The tentative rand recovery from a record low of 19.35 per dollar is encouraging option traders to prune bets on further losses. Implied volatility, which measures expected changes based on the price of options to buy and sell the rand, fell below actual volatility in late March, suggesting that traders expected fluctuations to begin to moderate. That spread has continued to expand and is now the largest in nearly 11 years.
Bullish speculators
Investors in the futures market are becoming more optimistic. Traders now have a net position in the long rand, which means contracts that bet on rand gains against the dollar outperform bets on falls, data from the Commodity Futures Trading Commission shows. That’s a change from late March to early April, when net shorts were at the highest level in more than a year.
Exaggerated sale
The fall in the rand has pushed a technical indicator known as the relative strength index above the oversold level. The monthly RSI for the South African currency has moved above 70, a level that suggests to some merchants who the selloff has gone too far and the rand may be poised for a bounce. The last time the monthly RSI was above 70 was in March 2016, when it preceded a 10% increase in the following 12 months.
Bond flows
The relentless sale of South African government bonds (60 billion rand ($ 3.2 billion) of outflows this year) has begun to slow. A key risk, the country’s exclusion from the FTSE World Government Bond Index, came and went in late April. That means investors who see South Africa’s relatively high returns don’t have to worry about a sudden spike in outflows. The 30-day moving average of daily departures has dropped to 588 million rand, from 2.3 billion rand in April.
Consecutive earnings
Meanwhile, the rand posted a second consecutive week of gains last week for the first time this year. With the return of risk appetite as countries around the world ease blocking restrictions and Federal Reserve policy measures weaken the dollar, and with little on the local front to scare investors, that may be the beginning of a trend.
“The rand will follow the course of global financial markets,” said Warrick Butler, a Johannesburg-based trader at Standard Bank Group Ltd., who believes the rand will appreciate at 16.50 to the dollar by the end of the year. “Domestic problems are no longer a major concern, unless, of course, we are atypical.”
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