The rand’s at a tipping point, with analysts and derivatives traders at odds over the next move for South Africa’s currency.
For Societe Generale SA, the rand’s 7.3% rally in the past three weeks is just a temporary blip, with more weakness in store as poor fundamentals and an unfavourable external backdrop weigh on the currency.
Others, including Standard Chartered, see the currency as undervalued and due for further gains, though perhaps not quite yet.
“The rand falls into a category of currencies we are looking closely at but have a lot of challenges,” Eric Robertsen, global head of foreign-exchange research at Standard Chartered, told reporters in Johannesburg.
“Our expectation is that the currency will improve. But it’s in need of a catalyst.”
That catalyst may come this week, with a raft of data that may give clues about the outlook for South Africa’s economy including jobs numbers, the trade balance and producer inflation, in addition to the Federal Reserve’s rates decision Wednesday.
These charts show how the markets are positioned ahead of those events:
Analysts are becoming more bearish, with the median forecast for the rand versus the dollar by year-end climbing to R14.75, from R13.80 at the end of August. That would represent a weakening of about 3% from its current level of R14.36.
“The risk backdrop for emerging markets remains fraught by challenges including the ongoing drain of global liquidity, slowing global growth, and trade tensions,” strategists at Societe Generale including Jason Daw said in a report.
“The rand is particularly vulnerable due to its current-account deficit, high foreign participation in local financial markets, low foreign-exchange reserves and weak debt and fiscal metrics.”
Traders in the futures markets are bracing for more declines, with CFTC data showing net short-rand positioning at the highest since December 2015.
The bearish views on the currency come ahead of a rating decision by Moody’s Investors Service and South Africa’s mid-term budget statement, both due next month.
But the options markets is less gloomy, with bearish rand bets easing from the two-year-high levels reached on 5 September.
The premium of options to sell the currency over those to buy it in the next three months, known as the 25-Delta risk reversal, has declined 223 basis points since then to a one-month low, and by this measure traders are less pessimistic about the rand than the Russian ruble and Turkey’s lira.
The rand is close to strengthening below its 50-day moving average against the dollar, suggesting momentum is swinging in the rand’s favour.
The last time it fell below that measure on a sustained basis, in November last year, the rand strengthened about 13% against the dollar in four months.