Charts Show Rand Bears Are Running for Cover, With One Proviso

  • Analysts upbeat on South Africa’s currency as risks fade
  • One gauge shows traders still hedging for worst-case scenario

The outlook has rarely been better for South Africa’s rand.

With one exception, the charts are pointing in the right direction for the currency to extend gains that have seen it outperform 30 peers in the past 12 months. Risk measures from volatility to credit-default swap prices are falling, analyst forecasts are at their least bearish in 18 months, and bond inflows are rising. But one measure shows traders aren’t quite convinced.

Analysts’ Forecasts

The median forecast of analysts in a Bloomberg survey predicts the rand at 13.70 per dollar by the end of the second quarter. While that may seem bearish -- the currency traded at 12.7486 per dollar on Friday -- the forecast has dropped from 15.83 a year ago. The last time analysts saw the rand below 14 per dollar was in October 2015.

Volatility

The rand’s realized volatility against the dollar has dropped to the lowest level since December 2015. Implied volatility, based on prices of options contracts to buy and sell the currency and a predictor of future price swings, is also at a 15-month low. That makes the rand a less risky option for traders who borrow dollars to buy high-yield currencies, known as the carry trade. The dollar-rand carry trade has returned 9.25 percent this year, the most out of 31 major currencies tracked by Bloomberg.

Portfolio Flows

Foreign investors are regaining their appetite for South African bonds after a selloff sparked by the Federal Reserve’s December rate increase. Offshore investors have bought the country’s debt at an average daily rate of 405 million rand ($32 million) in the past month, the fastest pace since September. With Fed Chair Janet Yellen reassuring investors this week that aggressive rate increases are not on the cards, South Africa’s yields -- the highest among investment-rated nations -- should continue to attract foreign money, supporting the rand.

CDS spreads

With political turmoil subsiding and the immediate threat of a credit downgrade averted, the cost of insuring South Africa’s debt against default has plunged to a 15-month low. The country’s credit-default swaps are trading below the emerging-market average, showing investors are becoming less concerned about risks.

Bearish Bets

One chart shows that while traders may be hoping for the best, they’re preparing for the worst: the premium of options to sell the rand over those to buy the currency has climbed by a percentage point this year to the widest after Turkey’s lira among 31 major currencies. That shows more traders are hedging against rand declines than rand gains.

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