Golden dead cat bounce
Recently we wrote of how an unexpected decision to hold rates from South Africa’s Reserve Bank forced an unexpected sell-off in the Rand. We noted that the severity and shock from that decision forced notable players to take heavy losses on long-Rand positions that very same day. Had those positions remained open, buyers of Rand would now be looking at strong returns, almost regardless of their funding currency of choice. Almost every currency cross – barring perhaps Yen – would have turned a profit from long-Rand exposure following the SARB decision, reflecting the strength of the move higher in South Africa’s currency since.
The reasons why are not a mystery but aside from a fortuitous ending to some seemingly uncertain global events, current pricing may seem misplaced. The key drivers of that recovery include optimism (yes, again…) of a resolution to the US-Iran conflict at least insofar as Hormuz traffic is concerned. Another significant catalyst for the Rand’s appreciation is the Federal Reserve’s decision to also hold rates. Eclipsing the SARB’s own decision one week later, the Fed also holding rates limits any narrowing of the carry-gap caused by the SARB’s prior decision to hold. The Rand, as well as other FX, has benefitted materially from this broad-based Dollar weakness.
The last key factor behind the Rand’s recovery has been gold. We wrote last month of a catastrophic decline in gold spot prices and the entering of a bear market within the commodity. The fundamentals for gold still do not look attractive. You could argue that flimsy optimism once again over the opening of the Strait of Hormuz may limit the need to raise rates further, thereby stemming the deterioration of the perceived return of gold. However, once again that argument relies on the materialisation of a highly uncertain geopolitical event which even then may not solve the world’s inflationary pressures. Whatever the cause, the 6% rally in gold spot prices over the last few days has also supported ZAR, with South Africa a notable net exporter of the precious metal.
Discussion and Analysis by Charles Porter
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