Traders least bearish on rand in 13 years as Moody’s downgrade priced in

A rand note (iStock)
A rand note (iStock)

Most analysts may be predicting South Africa will lose its last investment-grade rating, but derivatives traders couldn't care less.

Their bearish bets on the rand, measured by risk-reversal contracts, have fallen to the lowest level since before the 2007/08 global financial crisis. The premium of options to sell the currency in the next six months over those to buy it, known as the 25 Delta risk reversal, dropped to 2.42 percentage points on Friday, extending its fall this year to 1.2 percentage points.

That's despite Moody's Investors Service changing the outlook on South African sovereign debt, which it rates one step above junk, to negative on November 1. That gave the government perhaps only until February's budget to address its deteriorating finances.

The calmness in the options markets is largely because traders there had already anticipated a rating cut.

"Our baseline is for Moody's to downgrade to sub-investment grade after the February budget, but we believe this is priced in," Bank of America strategists David Hauner and Rukayat Yusuf said in a note to clients. "There should be a hiatus on negative fiscal headlines until then."

Staying bearish on South Africa is made more difficult when its yields are so attractive. Rates on rand government bonds average 9.3%, more than double the average of 4.2% among emerging-market peers, according to Bloomberg Barclays Indices.

ZAR/USD
16.93
(+0.72)
ZAR/GBP
21.57
(+0.88)
ZAR/EUR
19.76
(+0.98)
ZAR/AUD
11.93
(+1.38)
ZAR/JPY
0.16
(+1.17)
Gold
1867.94
(+0.71)
Silver
23.17
(+5.69)
Platinum
848.00
(+1.91)
Brent Crude
41.98
(+0.17)
Palladium
2221.71
(+0.92)
All Share
54247.81
(+1.84)
Top 40
50127.05
(+2.04)
Financial 15
9588.13
(+0.19)
Industrial 25
74229.70
(+3.26)
Resource 10
53508.98
(+1.08)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 1359 votes
It depends on how the funds are used.
73% - 8816 votes
No. We should have gotten the loan elsewhere.
16% - 1947 votes
Vote