Rand bears in ascendance as risks stack up from Moody’s to poll

The rand may be starting the week on a positive note in the spot market, but don’t be fooled: bearish signals are stacking up.

The South African currency gained 0.4% to 14.3801 per dollar by 11:28 am in Johannesburg, paring its loss this month 2% after it erased year-to-date gains last week amid concerns over the outlook for the global economy. On the local front, traders are also wary of a credit-rating review by Moody’s Investors Service at the end of the month and elections scheduled for May.

“This year’s bullish rand run now seems stalled,” Thanda Sithole, a Johannesburg-based economist at Standard Bank, said in a note to clients. “We are therefore cautious on rand direction amid increased global growth concerns, Brexit, US-China trade, and South Africa factors such as the rising risk of negative ratings by Moody’s as well as the May elections.”

These charts illustrate the bearish tilt:

Price swings

Since February, the rand has been back on its perch as the developing world’s most volatile currency. It’s one-month implied volatility climbed to the highest in nearly a month, overtaking Turkey’s lira, as options traders anticipate wider price swings in the run-up to the Moody’s rating review on March 29.

Risk reversals

Traders are leaning more toward hedging against rand declines in coming weeks. The premium of options to sell the currency over those to buy it in the next month, known as the 25-Delta risk reversal, has climbed 65 basis points this month. The measure is second only to Turkey’s lira in a basket of emerging-market currencies.

Short positions

Investors in the futures market are becoming more pessimistic, with non-commercial short-rand contracts outweighing longs, CFTC data show. That’s a turnaround from February, when traders were net long-rand for a brief period.

Selling out

Foreign investors are getting out of South African bonds and stocks. Non-residents have been net sellers of government bonds at an average rate of R115 million ($8 million) a day over the past month — not a huge number, but a turnaround from mid-February, when inflows averaged R434 million a day. And offshore investors have been net sellers of South African equities for the past 14 days, the longest streak since October 2017.