Rand's quick recovery rally surprises traders

THE South African rand's rapid turnaround from April's record low has already burnt some traders' fingers. There may be more victims, judging by the discrepancy between forecasts for the currency and its actual level.

TD Securities' long-dollar-rand trade, opened on May 21 at 17.92 per dollar, was stopped just eight days later when the currency strengthened below 17.45, handing the position a 2.6 per cent loss.

The trade was entered on expectations that easing by the South African Reserve Bank would hurt the attractiveness of the currency - but the opposite happened.

The bearish predictions were not limited to TD. Analysts in a Bloomberg survey see the rand reaching 18.95 per dollar in the second quarter - implying a decline of around 8 per cent from Friday's level of 17.50 per dollar. The probability of the rand weakening that much by the end of June is less than 10 per cent, according to Bloomberg's forecast.

In the context of rising US-China tensions, along with a deteriorating economic picture in South Africa, the timing of the rand's rebound "has been a bit surprising", said Per Hammarlund, chief emerging markets strategist at SEB in Stockholm. Still, "given that the rand and most other emerging-market currencies have some way to go before being back at levels from before the Covid-19 outbreak, the rally has enough legs to last through the end of the second quarter," he said.

The rand has strengthened 5.6 per cent in May, its first monthly advance this year and the best since January 2019. On the way, it breached two key resistance levels to further gains: the 50-day moving average at around 18.20 and the 23.6 per cent Fibonacci retracement from April's record low, at 18.04. Next up is the 38.2 retracement at 17.24, and a sustained breach could see the currency heading towards 16.50 per dollar, said Credit Suisse and Standard Bank Group.

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While a tentative return of risk appetite worldwide contributed to the rand's advance, the currency also received some support from a relatively hawkish central bank. The regulator on May 21 curbed expectations for further aggressive easing after cutting its benchmark interest rate for the fourth time in as many months in a bid to support an economy forecast to slump deeper into recession.

Also bolstering the currency were signs that record outflows from South Africa's domestic bond market may be coming to an end. Still, there are risks ahead. Rising tensions between the US and China could spill over into emerging-markets, while South Africa's economy has yet to show the full hit of the novel coronavirus lockdown. BLOOMBERG