‘Bulletproof’ Rand Reclaims Top Spot Among Emerging-Market Peers

‘Bulletproof’ Rand Reclaims Top Spot Among Emerging-Market Peers

The rand has reclaimed its position as the best-performing emerging-market currency this year after being knocked off the top spot during last month’s bout of volatility.

A burgeoning trade balance and ample dollar liquidity are fueling the rebound and prompting traders to take bearish bets off the table, bringing its year-to-date to gain to around 4.2%.

Since falling to a five-month low on Aug. 19 amid speculation the Federal Reserve may start scaling stimulus sooner than expected, the South African currency has advanced 8% against the dollar, double the gain of Brazil’s real.

“At our morning briefing, the local unit was described as a rattlesnake and bulletproof,” Nema Ramkhelawan-Bhana, a strategist at Rand Merchant Bank in Johannesburg, wrote in a client note. “It sounded rather like an episode of Mad Max. Yet, the metaphors are apt in the face of the rand’s unrelenting strength.”

South Africa’s reached a record in the second quarter as elevated commodity prices boosted exports, while imports moderated as the economy struggled to emerge from a contraction.

Meanwhile, an International Monetary Fund Loan and additional Special Drawing Rights, resulted in a flood of dollars held by the central bank, which it has to sterilize by purchasing rand in the forward market, leaving lenders with a surplus of dollars.

As a result, the cost of borrowing the local currency against the greenback for one year in the swap market climbed to 105 basis points this month, more than triple the five-year average. That’s made it “awfully expensive” to fund long-dollar positions against the South African currency, said Ramkhelawan-Bhana.

The premium of options to sell the rand versus those to buy the currency over the next month, known as 25-delta risk reversal, has narrowed to two percentage points, the lowest in a year.

Elevated swap rates make long-dollar positions expensive

Record current-account surplus is also supporting the rand