Citigroup Inc. booked a loss of almost 5% in three weeks in a hypothetical trade betting against South Africa’s rand. It may not be the only one, as the currency’s advance to a four-month high catches many analysts by surprise.
The rand has strengthened 5% this month, leading emerging-market peers amid a risk-on mood fuelled by central-bank stimulus, news of positive vaccine trials and a solid start to the U.S. earnings season.
The weakening dollar is also pushing investors toward higher-yielding assets, Citi strategists led by Luis Costa said in a client note.
“For the moment, short-term flows seem to have been pushed into carry positions once again,” the strategists wrote. “Furthermore, one cannot underestimate the effect of a very dysfunctional US political environment on the engineering of a temporarily weak broad dollar.”
Citi closed its long dollar-rand trade recommendation that it entered on 25 June at a spot rate of R17.4475 per dollar, with a total loss of 4.8%. The rand gained as much as 1.5% on Wednesday to R16.5089 per dollar, the highest on a closing basis since 13 March.
While South Africa’s fiscal fundamentals hardly inspire confidence, and the central bank is in a policy-easing cycle that’s moved the benchmark repurchase rate to a record low, investors are attracted by the rand’s relatively high yields and liquidity.
The rand has returned 5.2% this month for investors who borrow dollars to buy higher-yielding assets, known as the carry trade.
That’s the most out of 23 major emerging markets monitored by Bloomberg. South African 10-year bonds yield 9.35%, the highest among major developing nations.
Many analysts have not yet caught up with the rand’s surge. The median forecast in a Bloomberg survey is for the rand to close out this quarter at 17.20 per dollar, which would imply a decline of around 4.2% by the end of September.
The probability of the rand hitting that level this quarter is about 60%, according to Bloomberg calculations based on prices of options to buy and sell the currency.