South Africa’s rand poses big problems for currency traders

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It is not that you cannot make money trading the currency. You very much can, and you might make it big and quickly. The problem is you can also lose much more than you gain and at a frightening pace. To play the rand, investors need not just thick skins and a heightened awareness of risk. They also must be schooled in the politics of South Africa, particularly the ruling African National Congress. According to JPMorgan, the rand looks unattractive “given the significant and varied likely political noise in the months ahead”. Investors should also follow the fluctuations in the price of gold, oil and other commodities South Africa exports, not to mention the economy of China, its biggest customer. “Any increase in market concern around the tightening in China would likely impact the rand via terms of trade effects on metals,” argue analysts at Morgan Stanley. Those keen to play the rand will need an understanding of the workings of the carry trade, a strategy that enables investors to borrow a currency with a low interest rate in order to fund the purchase of a currency with a high rate, such as South Africa. They should follow the trends that influence the exchange rate between the US dollar and emerging market currencies. In addition, investors ought to monitor the size of South Africa’s current account deficit and the country’s ability to finance it. They will have a keen eye on the country’s rate of inflation. Above all, they should never fall asleep on the job. The rand dropped 7.5 per cent in the last four days of March. It rose by the same amount in a nine-day stretch in April. Moves on this scale are frequent and can come with little or no warning. Anyone with the resolve to have played the rand over the long term will have endured a slide of more than 50 per cent in its value between 2011 and 2015 and seen a 13 per cent rise last year when it outperformed every EM currency except Brazil’s real and Russia’s rouble. Since Jacob Zuma became president in 2009, the currency has lost a third of its value. After an initial modest rise, it has been falling since the spring of 2011, hitting an all-time low of 17.83 rand to the dollar on January 31 this year. But has it reached a turning point? For some seasoned EM forex watchers, the rand’s path bears similarities to Brazil’s real, which fell heavily in the months leading to the political demise of former president Dilma Rousseff, then bounced when Michel Temer succeeded her. Mr Zuma is in the final year of his final term and his sacking last month of finance minister Pravin Gordhan has exposed fissures in the ANC. “The anti-Zuma sentiment is mounting in the country and international investors definitely do not like it,” says Arnaud Masset of online bank Swissquote. Mr Zuma had long threatened to fire Mr Gordhan but each threat triggered a big rand sell-off. The surprise is that when the sacking came, it did not lead to a more substantial decline. Rating agencies duly downgraded South Africa, which is worrying the country’s central bank, yet the rand has recovered about half the losses triggered by the sacking. Government bonds also recovered. There are two reasons, suggests the Dutch bank ING. First, global growth prospects are bright and look favourable for commodity exporters. Second, South Africa is not alone in facing political uncertainty. With events such as Brexit, the election of Donald Trump in the US and European political risk, there has been a “convergence” between the economic uncertainty of the developed market and emerging market, says ING. The economy is stumbling, however, with unemployment particularly high and inflation undershooting central bank targets. South African stocks are underperforming and the ratings downgrades hardly help. Although experienced rand investors have seen it all before, that does not make the currency any easier to trade.

[Source”cnbc”]