This year's strong rand performance points to rally reversal
May 6, 2009
By Garth Theunissen and Oliver Biggadike
No currency has performed better this year than the rand, and a growing number of traders and strategists say the rally is about to reverse.
The rand appreciated 15 percent this year to R8.3050 to the dollar, fuelled by rising demand for higher-risk assets and export driven currencies amid signs the global recession had bottomed. The rand even beat the Brazilian real, which offers higher money market rates.
Traders are now stepping up bets that the country's manufacturers won't be able to withstand a stronger rand, which makes their goods more expensive to foreign buyers.
Options show the rand has more potential to depreciate over the next six months than any other currency. Anglo Platinum said last Thursday that it had cut about 5 percent of its workforce as production and prices fell.
Flavia Cattan-Naslausky, a currency strategist with RBS Securities, said: "The rand at current levels looks too strong and overvalued."
Traders are more bearish on the rand to October than any of the other 15 most traded currencies tracked by Bloomberg, according to so-called risk reversal rates.
Weighing risk
The premium investors are willing to pay for six-month rand "put" options, which protect against currency depreciation, is 6.4 percentage points. That compares with 5.75 percentage points for the Mexican peso, the currency of the country at the centre of the swine flu epidemic, and 5.25 percentage points for the Brazilian real.
The rand's gains, which followed a 28 percent drop against the dollar last year, underscore a rally this year in export- driven currencies from the Chilean peso to the Indonesian rupiah that's been stoked by optimism that the worst of the global financial crisis is over. Finance ministers from the Group of Seven industrialised nations issued a statement on April 24 saying they saw "signs of stabilisation" in the world economy and that a recovery should begin to take hold later this year.
Such comments have boosted the appetite for higher-risk assets, such as emerging market currencies and stocks. The Morgan Stanley Capital International world index and the Standard & Poor's (S&P) 500 index have soared 30 percent since their lows on March 9.
As one of the more widely traded emerging market currencies, the rand is often viewed as a proxy for investors' appetite for risk. The rand traded in tandem with the S&P 500 index 63 percent of the time in the past two years, compared with 55 percent for Brazil's real and 51 percent for the Hungarian forint.
"The rand is the strongest evidence that the risk rally has been too quick," said Beat Siegenthaler, the chief strategist for emerging markets at TD Securities in London. "It's the one asset which has benefited the most without much fundamental reason."
Foreign investors bought R25 billion of South African assets more than they sold this year, with most purchases made in March, according to the nation's stock and bond exchanges. The JSE all share index has risen 12 percent since the end of February.
South Africa's economy would shrink 0.3 percent this year, compared with 4.2 percent for Europe and 6.2 percent in Japan, the International Monetary Fund said on April 22.
Risk appetite
"As long as risk appetite holds up, the rand could end the first half of this year stronger," gaining to R7.50 to the dollar by the end of next month, said Carlin Doyle, an emerging market currency strategist at State Street Global Markets in London.
Manufacturers in South Africa are not as sanguine.
Exports account for about 28 percent of the nation's economy, figures from Sars show.
Manufacturing, which makes up 16 percent of the economy, slumped a record 15 percent in February, according to Statistics SA. ArcelorMittal South Africa and Volkswagen have cut production.
"The strength of the rand is going to hit us hard because it compromises the competitiveness of our exports, which are already under pressure from the downturn in the global economy," said Roger Pitot, the executive director of the National Association of Automotive Component and Allied Manufacturers (Naacam).
Naacam, whose members make 14 percent of the world's catalytic converters, estimated the rand must weaken to R11 to the dollar and R14 to the euro to make South Africa's vehicle component exports "truly competitive", Pitot said. The rand was bid at R11.1173 to the euro at 5pm yesterday.
The currency might weaken to R10 to the dollar as a "sharp fall" in revenue from commodity exports widened the trade deficit, Morgan Stanley analysts wrote in a note to clients dated April 30. "We maintain our bearish view on the rand."
A 10 percent gain in the rand might shave 0.2 percentage points off gross domestic product if "sustained", said Andre Roux, the head of fixed income at Investec Asset Management in Cape Town.
Reserve Bank governor Tito Mboweni said on April 7 that he "would not be surprised" if the economy shrank for a second consecutive quarter in the three months to March, following a 1.8 percent contraction in the fourth quarter. The bank cut its repo rate 3.5 percentage points in the past five months to 8.5 percent.
Lower interest rates can make a country's currency less attractive to investors and traders on a relative basis.
Brazil's benchmark rate is 10.25 percent, while its level of unemployment is 9 percent, compared with 21.9 percent in South Africa. - Bloomberg
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