Pretoria – Traders who shorted the rand profited on news that Pravin Gordhan had been recalled from his overseas investor roadshow, according to Intellidex analyst Stuart Theobald.
Theobald tweeted a graph on Wednesday that reveals how the number of contracts of the dollar/rand futures spiked dramatically between last Friday and Monday.
The rand declined by more than 3% on Monday, on the news that President Jacob Zuma had ordered Gordhan home from his international investor trip. He was in London at the time.
The President, reportedly acting on a questionable intelligence report that alleged Gordhan was having secret meetings with bankers and had launched “operation black check” (sic) to remove Zuma, was on the verge of firing Gordhan. Apparently, three members of the top six of the ANC NEC prevented him from doing so.
“Did anyone else see the big jump in USDZAR futures contracts on Monday? Big profit for someone who saw #Gordhan news coming,” Theobald asked as he tweeted the revealing graph.
“I think it is more likely to be individuals than companies,” he added.
When a Twitter user said the data indicates a big increase on Monday and that it “might be after news broke”, Theobald responded, saying: “I hear it was before. And (there are only) increases only in those contracts so (it) doesn't look like general trading response to news.”
Theobald didn’t respond to Fin24 queries, but Purple Group analyst Nilan Morar told Fin24 on Wednesday that there were three possibilities how the rand could have been shorted.
The first, which he said is unlikely but which can’t be ruled out, is that someone close to sources knew the decision was about to be made and was able to short the rand.
The second, is that that traders are highly competitive and quick at spotting trends by using social media, online news and other sources to make fast and ahead-of-time trading moves.
The third, is that trading firms in the US increasingly use automated bots to trade. These bots process a mass of information and act independently to make trades. They may know things that humans don’t even know ahead of time.
The idea that a few individuals linked to key players in the recall of Gordhan shorted the rand is highly unlikely, according to Morar.
“The dollar/rand futures market trades between $4bn and $6bn daily,” he said. “It would require large firms acting in volume to get this type of impact.”
He said that the rand was nearing its threshold of R12.31 to the dollar and so everyone was on edge to short the rand. That was the near two-year high level at which the local unit was trading just before the news broke. It has since weakened to trade at R13.03 to the greenback by 07:37 on Thursday.
Jeremy Cronin, SACP first deputy general secretary and deputy minister of Public Works, was highly vocal about shorting the rand when Nhlanhla Nene was fired in 2015.
“There are indications that, just ahead of this tumultuous December week, somebody (presumably with foresight into the events about to unfold) took a multi-billion rand bet against the currency (technically known as shorting),” he wrote on Politics Web.
“They borrowed rands to purchase dollars and when the rand crashed they sold the dollars back for rands, walking away with several billions in profit.
“The same pattern appears to have occurred just over a week ago. Another multi-million rand bet is followed by a leaked rumour about the imminent criminal charging of an incumbent finance minister. The rand tanks and someone reaps another bonanza.”
In an interview on 702, he also alleged that the “rand was shorted before the Sunday Times published an article on the apparent prosecution of Gordhan”.
Though the claims could be difficult to prove, Cronin says that they may be as a result of insider information, 702 reported. “He suggests that these events are related to the corporate capture of the state.”
The Competition Commission announced in February 2017 that it is taking various South Africa and international banks to the Competition Tribunal of colluding on foreign currency trading.
From 2010 Bank of America, BNP Paribus, Citibank, Standard Chartered, JP Morgan, HSBC , Credit Suisse as well as Absa and Investec “manipulated” prices of bids by arranging to trade at particular times.
What it means to short the rand
The concept of selling an asset that one does not own can often be daunting and confusing. In financial markets this practice is commonly referred to as “shorting”, explains Morar.
Essentially a trader would identify an asset that they think is too expensive and the idea would be to sell a derivative (a financial instrument that is created with reference to an underlying asset’s price) of that asset with the aim of buying it back at a lower price. The difference in price between where it is sold and bought back represents the profit or loss on the trade.
Morar, using the local currency, explains by use of an example:
"The dollar/rand exchange rate (USD/ZAR) is quoted as the number of rands required to buy one US dollar, so a price of 12.30 indicates that it will cost R12.30 to buy one US dollar (ignoring transaction costs). Now, assume that you think the rand is too strong at 12.30 and that it should weaken.
"Effectively what you would do is sell rands and buy US dollars, so you buy US dollars with a strong rand. Assume further that you were correct in your view and the rand weakens to 13.00 and you close your position. This will then entail you selling US dollars and buying back rands. In essence you have bought dollars with a strong rand and sold dollars when the rand was weak, so your sale results in you owning more rands, i.e. it cost your R12.30 to buy one US dollar and you received R13.00 when you sold your dollar, thereby resulting in a 70c profit a piece."
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