The rand strengthened for a third day amid speculation that the worst emerging market currency slump this year has left the exchange rate undervalued.
The South African currency appreciated as much as 1 percent before paring its gains to 0.3 percent at 8.3778 as of 3:37 p.m. in Johannesburg, the second best performer out of more than 20 emerging market currencies tracked by Bloomberg. The rand has slumped 21 percent this year.
“In the South African space we have seen such a massive sell-off, I think the market might be a bit oversold,” Brigid Taylor, head of institutional sales at Johannesburg-based Nedbank Capital, said by phone. “A lot of players in the local market not being around creates thin markets.”
The rand slid 3.7 percent last week, breaking through 8.4550, which represents a 76.4 percent retracement level from a Nov. 30 low, according to Johannesburg-based ETM Analytics, citing the daily Fibonacci chart. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low. A break above resistance, or below support, indicates it may move to the next level. Support refers to an area where buy orders may cluster. Resistance is where there may be orders to sell.
“Once the markets have moved to price in the risk associated with North Korea this morning, the situation is bound to be a lot clearer,” George Glynos, an economist at Johannesburg-based ETM Analytics, wrote in e-mailed comments. An initial retreat by the rand would target levels toward 8.2650, which is a 38.2 percent Fibonacci retracement level.
The death of North Korean leader Kim Jong Il on Dec. 17 sparked concern there will be a power struggle in the communist nation, contributing to a fall in equities and commodity prices.
The MSCI Emerging Markets Index fell as much as 1.9 percent before paring its loss to 1.4% at 891.46 as of 2:20 p.m. in London, set for its lowest close in more than three weeks.
South African debt advanced, a third day of gains, with the yield on 13.5 percent bonds due 2015 declining 3.6 basis points, or 0.036 percentage point, to 6.910 percent.