Market positioning within the options sector suggests that South Africa’s rand is poised for a rebound that could mirror the rapid decline experienced in December.
The rand is on track for its worst December performance since 2015, coupled with its most significant quarterly drop in over two years. This is a result of a lightning-fast liquidation of long rand-dollar futures by hedge funds during the week ending 17 December, plummeting from 27,927 net long contracts to a mere 1,422, based on data from the Commodity Futures Trading Commission.
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Nevertheless, as the rand has wiped out all its gains from 2024 and remains at its lowest level since the elections in May, options traders are predicting that the underlying fundamentals that drove the rally prior to December will re-emerge after the New Year.
Six-month risk reversals — representing the difference in premiums between options to sell the currency as opposed to those to buy it — are currently at their lowest point ever. Moreover, the one- and three-month tenors are approaching record lows as well.
This trend signifies that the cost of hedging against additional declines in the rand is now more accessible than it has been in years, indicating that the turbulent period of December might be coming to an end.
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The rand has shown signs of strengthening since Wednesday (25 December) after temporarily breaching R19 against the US dollar. By midday Sunday, it was trading around R18.70.
© 2024 Bloomberg
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