Top Rand Analysts Diverge From Traders on Worst Currency

The most accurate forecasters expect the rand to extend last year’s worst major currency slump, even as options traders are at their most bullish in five months.

Commerzbank AG, the nearest to predicting rand-dollar moves in the past six quarters, sees a 6.2 percent slump to 8.35 by April as Europe’s debt crisis stokes risk aversion and slower economic growth damps demand for commodity exports. Traders are taking the opposite view, cutting the premium on options to sell the rand over those to buy to the lowest since August at 367 basis points amid speculation record-low U.S. rates will bolster higher-yielding assets, data compiled by Bloomberg show.

“The euro-region debt crisis will not be resolved in a smooth manner,” Justin Smirk, an analyst in Sydney at Westpac Banking Corp., the second-most accurate rand forecaster in data compiled by Bloomberg Rankings that predicts the rand to fall to 8.38 per dollar this quarter, said in e-mailed comments. “We see significant risk aversion developing just as Europe slides into a recession, which will hit all of the more risky assets including commodities, and thus also the rand.”

The rand tumbled 18 percent last year, the most among the world’s 16 main currencies, as a 22 percent decline in the LMEX London Metal Index cut export revenue for South Africa, the world’s biggest producer of platinum and the largest producer of gold on the continent. While developing countries including Poland, Mexico and Malaysia sold dollars to support their exchange rates, South Africa’s central bank hasn’t intervened to influence the currency.

Smaller Cushion

South Africa’s policy makers have less scope over the exchange rate because reserves are smaller relative to the size of the market. The central bank had $48.9 billion of reserves in December, or about half Poland’s $97.87 billion, while daily trading is about twice as high at $14.4 billion, according to the latest data from the Bank for International Settlements for 2010. Average daily zloty trading was $7.8 billion, according to the BIS.

“The rand has been more sensitive to market sentiment than other emerging-market currencies such as the zloty and lira because they are being supported by the central bank,” Thu Lan Nguyen, a currency strategist at Frankfurt-based Commerzbank, said in a phone interview. “The Reserve Bank’s cushion is not as big as some of the other emerging markets and so it is generally more cautious.”

Falling Reserves

The central bank adds to its foreign exchange reserves “as and when appropriate,” though it doesn’t target a level for the rand and won’t sell dollars to defend the currency, Governor Gill Marcus said in October.

The rand has gained 3.4 percent this month, spurred by the U.S. Federal Reserve’s pledge to keep interest rates low and European Central Bank loans to contain the sovereign debt crisis. Brazil’s real, Mexico’s peso and Poland’s zloty surged more than 6 percent. South Africa’s currency gained 0.3 percent today to 7.8208 per dollar as of 8:10 a.m. in Johannesburg.

Traders are showing more confidence in the currency, with three-month implied volatility against the dollar, a gauge of traders’ expectations for price swings, dropping to 16 percent on Jan. 27, the lowest level since Aug. 4. The rate is 247 basis points, or 2.47 percentage points, less than the currency’s actual price swings, the widest gap among more than 20 emerging-market currencies monitored by Bloomberg. Implied volatility was higher than actual moves as recently as Jan. 9.

The premium on options to sell rand over those to buy the currency has more than halved from as high as 840 basis points on Oct. 5, data compiled by Bloomberg show.

Growing Odds

“The odds are turning increasingly in favor of the rand extending its gains in the weeks and months ahead,” George Glynos, an economist at Johannesburg-based ETM Analytics, wrote in a Jan. 23 research note.

Finance Minister Pravin Gordhan said last year that the flexible exchange rate acts as a “shock-absorbing mechanism” by depreciating when capital is flowing out of the country, improving exporters’ competitiveness and narrowing the current-account deficit.

Foreign investors sold a net 21.6 billion rand ($2.4 billion) of South African equities since the beginning of 2011, according to JSE Ltd. Slowing growth in Europe, which buys 30 percent of South African manufactured goods, drove the trade deficit to 21.3 billion rand in the first 11 months of last year from 5.3 billion rand in the year-earlier period, the South African Revenue Service reported.

The central bank cut its economic growth forecast for this year to 2.8 percent on Jan. 19 from a previous estimate of 3.3 percent and pared projected growth for next year to 3.8 percent from 4.2 percent.

Slower growth in South Africa and the risk of a worsening euro-region debt crisis is likely to reverse the rand’s rally, said Nomvuyo Guma, a Johannesburg-based currency strategist at Standard Bank Group Ltd., Africa’s biggest rand trader.

“Despite this liquidity-induced optimism that has been keeping markets buoyant thus far this year, we maintain that there is downside risk for the rand once the euphoria fades,” Guma said. “The rand’s fundamentals don’t support this rally. We still hold a bearish view on the rand.”

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