Sydney - There’s more Monday morning pain to come for South Africa’s rand as Japanese retail investors are forced to end their romance with the currency, Macquarie Bank said.
READ: Rand's uncontrolled drop to cause further rate hikes - analysts
The rand plummeted by the most in more than seven years on Monday as the market turmoil in China and a drop in US stocks deterred risk-taking.
The rand plunged as much as 9%, the most since October 2008, before trading down 2.3% at R16.6832 per dollar as of 10:57 in Singapore. By 07:45 in South Africa, it was trading even lower at R16.70. Reuters reported the rand fell as much as 10.3% at one stage in Asian trade to reach R17.9950/$, by far its weakest level ever.
READ: Rand sinks most since 2008 as traders fret over China, liquidity
Open interest in the rand is the highest after the dollar and the pound for Japan’s individual traders, exceeding bets on high yielders such as the currencies of Turkey, Australia and New Zealand, according to data on Tokyo Financial Exchange’s website.
Positions more than doubled from June through December as the rand lost 24% against the yen.
Most of the bets are probably on rand gains since the typical investing style in this sector is to be long currencies that offer higher yields and to wager that current price moves will reverse, said Gareth Berry, a strategist at Macquarie in Singapore.
“As we keep going through key levels, you’ll see Japanese retail getting stopped out and margin calls forcing them to cut their positions, so that’s where the risk lies,” Berry said.
“We should brace for this type of price action, especially on Monday mornings, from now on and especially after the rand may have had a bad week.”
READ: People overreacted to Nene’s sacking, says Zuma
The South African currency sank more than 9% early on Monday versus the yen and reached record lows against the dollar and euro as sell orders mounted and buyers fell away. The slide coincided with the opening of Japan retail trading platforms at about 07:00 Tokyo time, as the platforms work even on Japanese public holidays such as on Monday, Macquarie said.
Data compiled by Bloomberg showed that offers to buy the rand against the dollar dried up around 07:04 Tokyo time.
READ: Brian Kantor: Zuma blunders now priced into SA assets as a permanent danger
The rand has already dropped 10% versus Japan’s currency this year, after losing a quarter of its value in 2015. The currency has been rattled by a slump in commodity prices, lacklustre economic growth and rising US interest rates.
“Liquidity is at a premium at this time of the week anyway, it’s sort of a twilight zone first thing on a Monday morning so that certainly didn’t help,” Berry said.
“The key thing here is that we should brace for this type of price action especially on Monday mornings from now on, especially after the rand may have had a bad week the week before.”
Japan sends rand into free fall
Reuters reports that the rand's losses on Monday came after dropping sharply in erratic Asian trade with dealers talking of Japanese sellers in a very illiquid market.
"It appears as if yield-hungry Japanese retail investors decided to cut their ZAR positions this morning, which triggered a number of stop losses and sent the currency into free fall," Barclays Africa currency strategist Mike Keenan said in a note.
South Africa's currency has hit several record lows already this year on concerns about slowing growth in Africa's most developed economy and in-line with weakness in other emerging markets.
President Jacob Zuma said on Sunday that markets overreacted to his decision to change finance ministers twice in a week last month, comments likely to worry investors.
"Local sentiment remains poor and the fact that this weekend’s ANC conference did not address investor concerns, suggests that these fears could persist," Keenan said.
"The underlying ZAR mood remains extremely bearish."
The JSE securities exchange's Top-40 futures index was down 1.04%, suggesting the local bourse would open more than 450 points lower.
In fixed income, government bonds mirrored the rand, with the yield for the benchmark 2026 government bond adding 34 basis points to 9.865%.