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The wrong time to extrapolate weakness
Our indicators suggest that from a risk/return perspective, this is the wrong time to extrapolate rand weakness. It is easy to maintain a bearish narrative, but the reality is that plenty of bad news is priced in already to the currency. For bonds, we maintain that while ILBs appear fair, nominal bonds, too, are cheap.
The rand is pushing towards an “extreme peak”
Our “extreme peaks” model suggests that the current value of the rand is edging towards levels that would be consistent with previous “extreme peaks”, when depreciations slowed and appreciation or “normalisation” kicked in.
The USDZAR is an outlier relative to the commodities terms-of-trade
The rand also seems very weak relative to where South Africa’s commodities terms-of-trade suggest it should be. The rand remains a commodity currency and has tracked the country’s commodities terms-of-trade well over the years. The current value seems an outlier.
Speculative rand shorts, too, are near or at record-high levels
According to US CFTC data, non-commercial shorts as a percentage of open interest in the futures market are close to the highest level since the data has been available. It is very likely that this net short position has increased even further over the past week. The rise in short positions coincides with the sharp USDZAR deviation from our model trend.
Turning to bonds: ILBs are fair, nominal bonds still cheap
Relative to our fair-value estimates, nominal bonds still look cheap. ILBs, in turn, look fair, implying that real risk is well reflected in the yield curve. As a result, it seems that an elevated inflation risk premium is keeping nominal bond yields high.
The anomaly between the FRA market and the bond market
The FRA market still expects a hawkish SARB pricing in another 75 basis points (bps) of hikes in the cycle, which would put the repo at 9% in December, presumably under the assumption that that would put inflation closer to the midpoint of the target band. Despite these hikes being priced in by the FRA market, the bond market still sees substantially elevated CPI well above the target band.