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Cape Town – While rand gains have been relentless, analysts warned that the local currency has been overextended and should consolidate on Friday.
The rand was trading at R12.45 by 10:38, weakening from its early high of R12.43, and almost unchanged from its overnight close in New York, the strongest it has been in nearly two years.
Umkhulu Consulting’s Adam Phillips said he believes the rand is “a trifle overdone”.
However, he said in a note on Friday that “although the rand might move back above R12.50/$, don't expect it to roar back above R12.60/$ in the short term”.
Rand Merchant Bank analyst John Cairns said “rand gains have been relentless”.
“Still, they cannot continue for ever. It will be brave to trade against such an unremitting trend, but there are three reasons to think the rand might consolidate today," he noted on Friday.
“First, quite simply, it is Friday. Normally the market is cautious about keeping on aggressive positions over a weekend and so Fridays often see a counter-trend reversal.
“Second, global factors are not supportive for further rand moves. Global equities have faltered and the dollar has actually managed to bounce overnight after its own relentless run weaker.
“Third, the rand is looking overextended. Other risk currencies — AUD, CAD, NZD, TRY, BRL, HUF — all drifted weaker yesterday. Only the ZAR and MXN pushed stronger.”
Monthly rand/dollar moves between 2015 and 2017 reveal how the rand has been gaining ground in the last year. (Graph: Bloomberg)
TreasuryOne dealer Andre Botha said on Friday that the “rand hitting R12.43/$ as a run on R12.2000 seems ever the more likely”.
“However, the feeling is that the rand is starting to get overextended and that was in evidence when looking at other emerging markets.
“South Africa is diverging from other emerging markets and it has done so without any real explanation or economic event.
“Could this be a latent effect of market players entering the South African market, after the dovish Fed? It is certainly a possibility, but normally emerging markets converged quite swiftly after a divergence so we can expect the rand to lose some ground today.
“There could also be some position squaring happening today because it's Friday and this could lead to the rand giving up some ground as well.”
Cairns said its RMB options trader argued that the market wanted to be long rand, but was cautious about doing so before the Fed.
“So, as soon as the Fed was out of the way, people rushed in, generating the current rand rally. This certainly ties in with the data showing a surge of foreigners buying bonds in the past few days and the continuous rand gains every day since the event. Wednesday’s current account data merely added to the impetus.”
