No Looking Back for S. African Rand as Bears Lose Conviction

JOHANNESBURG (Capital Markets in Africa) – Rand bears are on the retreat as South Africa’s currency heads into 2019. The currency got off to a blistering start to the year, adding 3 percent amid receding worries over the U.S.-China trade war and the Federal Reserve’s second thoughts about policy tightening. And in a sign investor are leaving last year’s 14 percent slump behind them, some bearish indicators back at levels last seen before Turkey’s meltdown in August.

The premium of options to sell the rand against the dollar over those to buy it in the next three months, known as the 25-Delta risk reversal, narrowed 12 basis points on Monday to 302 basis points, the lowest since August 9.

Investors in the futures markets have also turned bullish, CFTC data show, with non-commercial long-rand contracts outweighing short-rand bets in December for the first time in three months.

And after dumping a net 57.5 billion rand ($4.1 billion) if South African government bonds in 2018, investors are starting to see value in the country’s debt. Offshore investors have been net buyers every day this year, with inflows rising to 3.5 billion rand ($252 million) on Friday, the most in a day since October 11, according to JSE Ltd. data.

The inflows have helped drive the yield on benchmark 2026 government securities to a five-month low of 8.73 percent.

Morgan Stanley analysts Hans Redeker, James Lord and Gek Teng Khoorecommend buying the rand as sentiment over emerging-market currencies improves and as polls show the ruling African National Congress may secure a more than 60 percent win in the general election in May. The analysts initiated a short dollar/long rand position with a target of 13 and a stop loss of 14.5.

“Risks to this trade include a renewed escalation in trade tensions and fall in commodity prices as well as any further negative headlines around Eskom.”

Source: Bloomberg Business News