Is the Ramaphosa party over for the rand?

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Johannesburg – Is the party over for the rand?            

South Africa’s currency reached a three-year high after

Cyril Ramaphosa was sworn in as head of state on February 15, fueling
optimism among investors that management of the economy will
improve.

By 07:20 on Wednesday morning, ahead of National Budget to be delivered later in the day, the rand was trading 0.41% weaker at R11.77 against the US dollar from its overnight close.

Benchmark bond yields fell to levels last seen in 2013, while
stocks had their best week in more than eight years. With the rand
paring some of its advance this week, traders are divided about whether
there’s scope for further gains.

Citigroup thinks the market has run ahead of itself, and

took profit on its rand and interest-rate bets this week. JPMorgan Chase & Co agrees, but is

staying put in the absence of any near-term triggers to spark a correction. Societe Generale, on the other hand,

increased its overweight exposure to South African sovereign debt, while Standard Chartered is

betting on further rand strength.

“There has been a fantastic run in rand assets,”

Luis Costa, a strategist at Citigroup Global Markets, wrote in a
note Monday. “The so-called Ramaphosa rally has indeed materialised. It
is now time for some reflection.”

Momentum indicators suggest the rand’s not about to surrender its
gains. The dollar’s 14-day relative strength index versus the rand has
remained above the 30 level since the beginning of February, and is
moving higher. A level below 30 indicates to some traders that the rand
has strengthened too quickly and is due for a correction. While a
reading just above 30 hardly suggests further rand gains, it also
indicates that the market’s not yet ripe for a retreat.

While JPMorgan sees the rand at about 7.5% overvalued, the
currency’s real effective exchange rate – a measure of its value
against a basket of majors – is close to its long-term average,
suggesting it’s about as fairly valued on a trade-weighted basis as it’s
been in the past ten years.

Short-term risks – such as a downgrade of
rand debt to junk by Moody’s Investors Service – are diminishing, so
there’s nothing to push the rand off its pedestal for now, JPMorgan’s

Anezka Christovova wrote in a note to clients.

The rand’s implied volatility is on the decline from the elevated
levels it reached during the leadership battle between Ramaphosa and
Jacob Zuma. That suggests traders are anticipating price swings to
narrow even as short-term risk factors – including Wednesday’s

budget presentation and the debt-rating review by Moody’s – approach.

The premium of options to sell the currency versus those to buy it,
known as the 25-Delta risk reversal, is also ticking lower as traders
cut back on bearish bets.

“The bond and currency markets now seem to be largely, if not fully,
pricing in significant fiscal consolidation and, as such, a steady
rating by Moody’s,”

Zaakirah Ismail, a strategist at Standard Bank Group, said in a
note Tuesday.

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