{"id":506022,"date":"2021-07-14T14:36:36","date_gmt":"2021-07-14T12:36:36","guid":{"rendered":"https:\/\/businesstech.co.za\/news\/?p=506022"},"modified":"2021-07-14T14:36:36","modified_gmt":"2021-07-14T12:36:36","slug":"the-rand-has-become-the-currency-to-bet-against-as-south-africas-problems-grow","status":"publish","type":"post","link":"https:\/\/businesstech.co.za\/news\/finance\/506022\/the-rand-has-become-the-currency-to-bet-against-as-south-africas-problems-grow\/","title":{"rendered":"The rand has become the currency to bet against as South Africa’s problems grow"},"content":{"rendered":"

Deadly riots. Sky-high unemployment. A surge in virus infections. Add to that rising US inflation and prospects of Federal Reserve tapering, and South Africa\u2019s rand is in a tight place.<\/p>\n

The currency plunged this week, ceding its position as the year\u2019s top emerging-market performer.<\/p>\n

Deadly protests that erupted following former President Jacob Zuma\u2019s jailing showed no signs of letting up, disrupting South Africa\u2019s Covid-19 vaccination program and threatening food shortages as supply chains buckled. The nation\u2019s dollar debt headed for the biggest three-day drop since May.<\/p>\n

Investors are concerned that the unrest – the sternest test yet to President Cyril Ramaphosa\u2019s authority – will derail South Africa\u2019s efforts to rebuild the economy in the wake of the pandemic.<\/p>\n

Citigroup reduced its overweight South African government bond position in its model portfolio and recommended selling the rand.<\/p>\n

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\u201cThe riots are a blow to Ramaphosa and investors alike and if they persist, they could weigh on the reform course, the economic outlook and also the President\u2019s legitimacy,\u201d said Trieu Pham, a London-based emerging markets strategist at ING Bank.<\/p>\n

\u201cIt\u2019s been an absolutely impressive year until now for South African risk assets, so at these levels some caution is warranted.\u201d<\/p>\n

The South African currency caught a breather on Wednesday after plunging to R14.78, the weakest since 1 April, wiping out all its gains for the year.<\/p>\n

But options traders still see an 81% probability that the rand will slide to 15 per dollar this quarter, up from about 34% in early June.<\/p>\n

The Taiwanese dollar and Chinese yuan eclipsed the rand on Tuesday as this year\u2019s top emerging market performers.<\/p>\n

Selling the rand is becoming one of the favoured strategies for investors seeking to profit from relative-value trades as a spike in Covid-19 cases keeps expectations for tighter monetary policy at bay. Pimco is going long in the currencies of Russia and Brazil – which have raised interest rates this year – against those that aren\u2019t getting a lift from policy tightening such as the rand.<\/p>\n

Deutsche Bank is advising investors to short the South African currency against the Russian ruble.<\/p>\n

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Meanwhile, the cost of hedging against rand declines is rising. Three-month risk reversals – the premium of options to sell the currency over those to buy it – have jumped 20 basis points this week. Overnight implied volatility climbed to the highest since March.<\/p>\n

\u201cI definitely see more downside risk for the rand,\u201d said Christie Viljoen, an economist at PWC based in Cape Town.<\/p>\n

\u201cAfter a few months running strong against the dollar, the past few weeks has reminded investors of South Africa\u2019s fundamentals.\u201d<\/p>\n

Outflows from South Africa\u2019s stock and bond markets have accelerated since June. Foreign investors have dumped the equivalent of a net $7 billion of securities this year through Monday, according to JSE data compiled by Bloomberg.<\/p>\n

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That\u2019s putting pressure on the current account, negating some of the benefit of a ballooning trade surplus. It\u2019s also keeping the government\u2019s borrowing costs high at a time when it\u2019s struggling to reduce a budget deficit of more than 11% of gross domestic product.<\/p>\n

While the benchmark FTSE\/JSE Africa All Share Index has been buoyed by strength in \u201crand-hedge\u201d companies that have income from abroad and benefit from weakness in the local currency, the stock market hasn\u2019t escaped unscathed.<\/p>\n

Bank shares have been hard-hit by the fallout from the violence and the currency\u2019s battering, with an index for the sector plunging 4.5% on Tuesday, the steepest drop this year.<\/p>\n

The selloff may be a temporary blip, said Gustavo Medeiros, deputy head of research at Ashmore Group in London. While the unrest can lead to more economic problems, it may not last, he said.<\/p>\n

\u201cThere isn\u2019t a strong case for protesting in the first place, so this may well be a temporary event,\u201d Medeiros said.<\/p>\n

\u201cThe external confidence in South Africa will remain strong unless we see a strong selloff in commodities.\u201d<\/p>\n

But with the \u201cbuy-everything rally\u201d over, it would take a strong turnaround in South Africa\u2019s fortunes to entice investors back, according to Ian Beattie, co-chief investment officer and head of emerging markets at NS Partners in London.<\/p>\n

Investors are looking for \u201cquality and growth,\u201d he said, and South Africa has neither.<\/p>\n

South Africa is \u201camong our largest underweights,\u201d Beattie said.<\/p>\n

\u201cIt will be impacted by a weakening growth environment globally, the US dollar rally and negative sentiment for positioning toward emerging markets. It continues to suffer terribly from Covid-19 and has low vaccination deployment, and the political unrest and riots are unsettling.\u201d<\/p>\n

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Read: South Africa faces another big budget problem this year<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Deadly riots. Sky-high unemployment. A surge in virus infections. Add to that rising US inflation and prospects of Federal Reserve tapering, and South Africa\u2019s rand is in a tight place.<\/p>\n","protected":false},"author":59,"featured_media":467482,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11121],"tags":[26],"class_list":["post-506022","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-headline"],"_links":{"self":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/506022","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/users\/59"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/comments?post=506022"}],"version-history":[{"count":3,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/506022\/revisions"}],"predecessor-version":[{"id":506032,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/posts\/506022\/revisions\/506032"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media\/467482"}],"wp:attachment":[{"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/media?parent=506022"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/categories?post=506022"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstech.co.za\/news\/wp-json\/wp\/v2\/tags?post=506022"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}