South Africa’s rand is on track for a sixth consecutive week of declines versus the dollar — but there are indications the selloff may be about to ease.
(Bloomberg) — South Africa’s rand is on track for a sixth consecutive week of declines versus the dollar — but there are indications the selloff may be about to ease.
One of this year’s worst emerging-market performers, the rand has carried a heavy risk premium amid concerns about the nation’s growth as state-owned power company Eskom Holdings SOC Ltd deploys unprecedented rolling blackouts. Anticipation about a government bail-out of the company have also been baked into the rand, which has floundered as peers such as Chile’s peso have surged.
The tide may be turning. Investors largely welcomed Finance Minister Enoch Godongwana’s plan for embattled Eskom, which spurred a brief rally in the rand and the biggest foreign bond inflows in nearly two weeks on Thursday. Traders have also begun to bet that a weaker US dollar will cool some price pressures that have been evident globally — which would support the rand’s prospects.
Bank of America strategists including Mikhail Liluashvili and David Hauner said they had turned bullish on the rand in a global research report published Feb. 24, forecasting the currency to rise 2% from current levels by the end of March.
Here are some other signals that show prospects may be improving for South Africa’s currency.
The rand is the most undervalued emerging-market currency apart from Russia’s ruble. That’s according to the Big Mac currency valuation — a survey created by The Economist magazine in 1986 to measure purchasing power parity (PPP) between nations, using the price of a McDonald’s Big Mac as the benchmark. The real effective exchange rate, a measure of the value of a currency against a weighted average of several foreign counterparts, shows the rand is now the most undervalued it has been since Nov. 2020.
Currency investors are paying the lowest premium in nearly 17 years to hedge against further losses in the rand. The premium to own downside exposure in USD/ZAR over six months is the narrowest since 2006, risk reversals show.
“We continue to see markets biased toward a relief in South Africa risk,” said Luis Costa, global head of sovereign credit at Citigroup, in a note to clients. Despite mounting growth challenges, “markets do not look likely to challenge this for now,” he said.
Technical indicators suggest the declines may have been overdone. The dollar rand cross is overbought, according to its relative strength index. That signals that a rand rebound may be due, after the selloff fueled by concerns around Eskom and higher-for-longer US rates.
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