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Lagos - Wall Street bears are stalking the rand.
As South African political risks mount and commodity prices retreat, banks from JPMorgan Chase to Morgan Stanley and Bank of America are telling clients to short the rand against other major emerging-market currencies, including Turkey’s lira and Mexico’s peso.
They’re predicting the selloff that began in late March when President Jacob Zuma sacked his Finance Minister Pravin Gordhan is about to repeat itself.
Only this time the trigger may come if Zuma survives a possible parliamentary vote of no confidence and his former wife, Nkosazana Dlamini-Zuma, is named head of the ruling African National Congress in December.
“It’ll be difficult for the rand to regain the bullish momentum that dominated throughout the second half of 2016 and earlier this year,” said Piotr Matys, a currency strategist at Rabobank in London who sees the currency weakening beyond R14 per dollar in the next few months. “The rally is more than likely over.”
The currency is down from the beginning of the week, trading at R13.52 to the dollar at 07:40.
Until the end of March, the rand was the biggest beneficiary of an emerging-market rally partly fuelled by speculation that the US Federal Reserve would enact a slower pace of interest-rate increases. The currency at one point gained as much as 12% in 2017, the most in the world, to trade at its strongest level since 2015. And until the week before Gordhan was fired on March 30, the dollar-rand carry trade handed investors the highest returns among developing nations this year.
Gordhan’s dismissal, though, was a reminder of the risks brewing in Africa’s most industrialised nation. It sparked a slide in the rand that trimmed its advance this year to 1.9%. And as the currency retreated, Fitch Ratings and S&P Global Ratings cut South Africa’s debt to junk. Moody’s Investors Service put the nation on review for downgrade last month.
Adding to the negative backdrop is the slide in prices for metals and other commodities that account for more than one-third of South Africa’s export revenue. An index of raw materials dropped this week to the lowest level in a year.
Not attractive
The rand is “uncompelling at current levels given risks of further political noise in the months ahead and a pending Moody’s rating review, and headwinds from falling iron ore prices,” JPMorgan London-based analysts Saad Siddiqui and Michael Harrison said in a note May 5. “We have been shifting our portfolio by rotating out of long positions in commodity currencies, preferring commodity importers.”
JPMorgan said clients should target a level of R3.9 versus the Turkish lira. BofA recommended last month buying the lira when it traded at R3.64 and targeting a 12% gain to R4.1. So far, the trade would have made investors about 3%.
Not everyone is convinced the rand’s heading for losses. Pacific Investment Management says it’s “no longer so fragile” given South Africa’s reduced current account deficit, which it mostly funds through portfolio inflows.
Rand versus peso
Morgan Stanley prefers shorting the rand against the Mexican peso, which has risen since January as President Donald Trump’s administration tones down talk of scrapping the North American Free Trade Agreement. Canceling NAFTA would be a blow to the peso, because Mexico’s total trade with the US. is about double the value of its exports and imports with other countries, according to data compiled by Bloomberg.
Morgan Stanley recommends targeting a move to R1.33 peso against the rand from R1.41.
The New York-based lender is also bearish on South Africa’s benchmark local-currency government bonds due in December 2026 and expects the rand to head toward R15.4 per dollar by the end of 2017.
It assumes Dlamini-Zuma will succeed Zuma as ANC leader this year, defeating Deputy President Cyril Ramaphosa, most investors’ preferred choice. That would mean a “continuation of current policy drift,” it said in a May 4 note.
“Investors remain too optimistic about South Africa’s fundamentals and politics,” Min Dai, a Morgan Stanley fixed-income strategist, said in the note. “In the first three months of the year, investors had good reason to be bullish on South Africa. However, recent political uncertainty has led to a worsening macro outlook.”
