Since the beginning of this year, the South African rand had depreciated by 6% against the USD, and is currently the weakest of EFFS tracked currencies.
Contrary to popular view, this is not likely as a result of the recent Fitch downgrade of South Africa’s sovereign debt or as a direct result of the bad sentiment that abounds – both of which were expected by the market.
Furthermore, emerging market investors and exporters are now in a position to take advantage of the position of the rand.
This is according to Mark Wilkes, senior sales trader at GT247.com, who says it is likely that a lot more speculative capital has been pushing the markets in an attempt to weaken the ZAR.
“The very well anticipated, reactive Fitch downgrade of SA’s sovereign debt on 10 January cannot be responsible for the price movement. Rather it functioned as a catalyst, coinciding with a number political and labour related headlines,” he says.
Furthermore, although some degree of ZAR asset selling was done by emerging market funds who may have felt at risk with the negative news flow, Wilkes says it is very unlikely that larger offshore investors, especially into the bond market, have or will sell en-masse.
“The rapid depreciation knock that bond investors will have had to have taken with the currency slide makes it unlikely that there is significant bond selling at this stage. In addition, many longer term bond investors have some degree of derivatised ZAR cover – the rolling of which is also problematic. Again this is largely because a lot of the bad news was already known in the market,” he says.
Wilkes says speculative capital has been pushing the markets in an attempt to weaken the ZAR and yields to the point whereby momentum becomes decidedly negative and creates a negative recursion.
“The key factor here is that all traders of the rand are aware of the delicate balance between FDI into the Bond and Equity markets, balanced against the very weak current account situation. They are therefore aware that any large scale aggressive switch out of SA bonds would shred the currency – and the reality is that the yield on SA bonds is already priced with some degree of political discount,” he explains.
Thus Wilkes says, with average yields on SA government securities having weakened by c.20bp across the curve and the 6% devaluation against USD, emerging market investors are now in a position to achieve a much better yield than bong buyers and passive WIGBY index trackers did last year.
“Another factor is that the ZAR and other emerging market currencies recently climbed off of the ‘Risk On Risk Off’ headline that has dominated markets for so long. This is against an environment where Eurdebt may weaken as capital moves towards Eurozone equities more aggressively, and a devaluing USD.”
Wilkes says exporters may be wise to take advantage of a ZAR:USD above 9:1, given the global wash of liquidity, and subject to bond bubbles bursting in other nations.
He warns that it is challenging to see what will turn the rand around in terms of news flow in the near future.
“It is thus more likely that the turn-around will come when offshore investors perceive value in the ZAR depreciation matched by weakened bond prices and higher yields. This should be and will most likely remain attractive over ZAR9,” he says.