By Robert Brand.
Traders in options on South Africa’s rand are starting to bet that King Dollar’s best days are over.
The cost of hedging against rand declines, as measured by the premium of options to sell the currency over those to buy it, fell to about 190 basis points on Friday, according to data compiled by Bloomberg. That’s less than half the long-term average, and the lowest since early 2006, when the rand was buoyed by the commodities super-cycle that peaked two years later.
The rand — often seen as a proxy for emerging-market sentiment — has weakened more than 6% against the greenback this year. While part of that move was due to dollar strength and expectations of further US policy tightening, the South African currency has also been hammered by local factors, including a deepening energy crisis. Most of the bad news may now be priced in, if the risk reversals on currency options are any indication.
So-called dollar-rand risk reversals in shorter tenors are also at multi-year lows, suggesting “that the pressures on the rand may well dissipate in the coming months,” economists at Rand Merchant Bank wrote in a client note this week.
That’s good news for the rand’s emerging-market peers, most of which have also seen risk reversals trending lower. The MSCI EM Currency Index has slumped almost 2% since the beginning of February amid a dollar bounce.
But the options pricing suggests traders are starting to position for a prolonged weakeaning trend in the dollar once the Federal Reserve’s policy rate peaks.