Rand Dump Spurs Hedging Costs as Bonds Sink: South Africa Credit
The rand’s fourth-quarter plunge is pushing costs to hedge against further declines to the highest level in two months amid the worst bond selloff on record.
The premium for contracts to sell the rand against the dollar compared with those allowing for purchases climbed to as much as 3.63 percentage points, three-month options data on Bloomberg showed yesterday. The risk reversal rate is at the highest level since Oct. 9 and the most among 16 major currencies tracked by Bloomberg.
Traders are turning more bearish on the rand after the currency’s slide this week to a more than 4 1/2-year low, sparked by speculation the Federal Reserve will start curbing stimulus sooner than anticipated. Foreign investors, who own about 37 percent of South African government bonds, dumped the debt for 12 straight days through yesterday, the longest run since Bloomberg began compiling data from the Johannesburg Stock Exchange in 1996.
“It has been a torrid November, and we’ve started badly in December too,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg yesterday. “The guys are positioning for the possibility of a taper in December. What’s worrying is that the rand is building up a bit of momentum, and if does, it can go quite far.”
The South African currency declined as much as 1 percent yesterday to 10.5389 per dollar, the weakest level since March 2009. It slid 0.3 percent to 10.4896 per dollar as of 11:33 a.m. in Johannesburg, extending its slide this year to 19 percent, the most 16 major currencies tracked by Bloomberg.
The rand’s three-month implied volatility climbed 172 basis points, or 1.72 percentage points, this week to 14.97 percent yesterday. Increasing volatility implies that options traders predict wider swings in the currency in coming months.
Options “are turning convincingly more bearish on the rand,” Sean McCalgan, head of real-time research at ETM Analytics, which advises companies on currency transactions, said by phone from Johannesburg yesterday. “It isn’t only a short-term play, it’s a medium-term one too. It is generally a broad-based increase in these risk measures which signals how rapidly rand sentiment is deteriorating.”
Foreign investors sold a net 38.8 billion rand ($3.5 billion) of South African stocks and bonds since the beginning of November, cutting capital inflows this year to 22.6 billion rand, according to data from the stock exchange. That compares with inflows of 91 billion rand for all of 2012.
The nation needs on average 19.5 billion rand of foreign investment a month to finance the current-account gap, according to Standard Bank Group Ltd. The shortfall widened to 6.8 percent of gross domestic product in the third quarter from a revised 5.9 percent in the previous three months as the rand’s decline boosted import costs, while strikes and subdued global demand hurt exports.
“We’ve seen large outflows, and ultimately that has to result in a weaker rand,” Michael Keenan, the South Africa strategist at Barclays Africa Group Ltd., said by phone from Johannesburg yesterday. Still, the currency’s decline may have gone too far as much of the potential negative effects of Fed tapering have already been priced in, he said.
“We’ve been calling for a move up to 10.50, but it’s come sooner than expected,” Keenan said. “There could be a pull-back. At around 10.20” could be opportunity to accumulate dollars, he said.
Minutes of the Federal Open Market Committee meeting Oct. 29-30 released on Nov. 20 showed that policy makers will probably reduce the central bank’s $85 billion of monthly bond purchases “in coming months” as the economy improves. The stimulus helped fuel demand for higher-yielding assets, including South African bonds, which posted record inflows in the 22 months through October.
The cost of insuring South Africa’s dollar debt against default for five years using credit default swaps climbed 42 basis points since the beginning of November to 226 yesterday, indicating that risk perceptions are rising.
Moody’s Investors Service, Standard & Poor’s and Fitch Ratings downgraded the nation’s debt since September last year, with Moody’s and S&P keeping the rating on negative outlook, signaling they may cut it again.
The reasons for the rand’s weakness “include the widening of the current-account and budget deficits, and at the same time we’re seeing a substantial reversal in foreign portfolio flows,” McCalgan at ETM said. “There is really no funding to back that rand deficit.”
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