Rand’s Ramaphosa Honeymoon Ends as Investors Take Bearish Turn

JOHANNESBURG (Capital Markets in Africa) – South Africa’s President Cyril Ramaphosa marked his first 100 days in office this month, and it seems the honeymoon period is over for the country’s currency too.

Bolstered by renewed investor confidence in Africa’s most-industrialized economy, the rand surged to a three-year high against the dollar in February, and held most of those gains for the rest of the quarter. Since then, it’s been downhill as emerging-market assets faced headwinds including rising U.S. rates, trade tensions and crises in economies from Argentina to Turkey.

The rand has slumped 9.5 percent this quarter, and it’s not over yet, some indicators suggest. These charts show why investors are becoming more bearish on South Africa’s currency.

Yield Pickup
A rise in benchmark rand-denominated bond yields to near 9 percent has increased the rate differential over U.S. Treasuries to about 6 percentage points, the widest since January. But with South Africa’s investment-level credit rating hanging by a thread, that may not be enough to reward investors for the risk of holding the debt. It’s well below the pickup offered by junk-rated Turkey and Brazil.

Bond Outflows
That helps explain why foreign investors, who hold around half of South Africa’s fixed rate debt, are dumping the bonds at the fastest rate on record. Outflows reached an average of 1.6 billion rand ($122 million) a day in the past month, and show no sign of abating. That’s weighing on the rand, as South Africa relies on portfolio flows to finance a persistent current-account deficit.

Hedging for Weakness
Small wonder, then, that traders are positioning for more rand weakness. The premium of options to sell the currency over those to buy it in the next three months, known as the 25 Delta risk reversal, climbed this week to the highest in almost a year and the most of any major emerging market.

Central Bank
Nobody is expecting the South African Reserve Bank to step in to support the rand; it hasn’t done that in two decades. But currency weakness feeds through to inflation, and that may force the central bank’s hand.

Forward-rate agreements, which as recently as mid-May predicted no rate increase this year, jumped in recent days to price in 20 basis points of tightening. That may do little to bolster the rand, but would be bad news for an economy that contracted an annualized 2.2 percent in the first quarter and is forecast to expand just 1.7 percent this year. And who wants to buy into a stagnating market?

Source: Bloomberg Business News