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The South African Rand has had a strong 2024, but it has lost value in the wake of Trump's election.
ZAR exchange rates caught a bid in the initial stages of news that Donald Trump and his Republicans swept the board in last week's vote, but strength proved short-lived.
"ZAR continues to be the worst performer, having broken the 18.00 support against USD," says a note from Citibank's FX dealing desk.
Citi traders say the combination of long ZAR positioning amidst a strong bid for the dollar is driving the washout in South Africa's currency, with desk volumes in the past 24 hours exceeding 124% of what would typically be expected.
In addition, a fall in the value of precious metals has added to the move, given South Africa's traditional status as a major raw metals exporter.
Gold prices have fallen sharply after Trump's victory:
"The rise in Treasury yields is one of the key factors behind the recent drop in gold prices. When yields increase, investors favour these instruments, as they offer a safer alternative with more attractive returns than gold, which does not generate yields. This shift leads to capital outflows from the gold market, exerting downward pressure on its price," explains Antonio Di Giacomo, Senior Market Analyst at XS.com.
W. Brad Bechtel, Global Head of FX at Jefferies, says emerging market currencies are fragile now as volatility rises and market participants are forced to reduce risk given their VaR limits.
"We see ZAR getting hit the hardest this week as that was one of the favoured longs in the markets," says Bechtel.
Above: The pound to rand conversion (GBP/ZAR) at 45-minute intervals.
The Rand strengthened against most peers in 2024, helped initially by rising bets that the Federal Reserve would slash interest rates. However, domestic drivers also supported the Rand, as investors welcomed the establishment of a coalition government following the mid-year general election.
Enthusiasm for the Rand meant the market built up a significant bet that further gains were likely. When positioning gets one-sided, any news that counters the narrative can result in a washout of these positions.
"We highlighted the risk of a rip through 18.00 in the aftermath of the election given the likely position cleansing that might ensue, but when we rallied hard in the EMFX space on the day after the election it felt like risk 'on' was the name of the game. But now the EM space is feeling the effects of a strong USD and uncertain times and that is leading to further risk reduction," says Bechtel.
Bechtel says this is a time where we will get some exciting opportunities but timing and picking our spots will be challenging.
"On the one hand you have an improvement in the government via the unity party which has sent the ZAR soaring, but on the other hand the structural issues remain acute and now you have the additional variable of a strong USD and Trump. The strong USD only going to make things harder to pay back for USD borrowers, especially those with fragile government structures and fiscal issues," he explains.
Citi says 18.15 is the next key level in USDZAR, with decent offers likely from 18.10.
GBPZAR spiked back to 23.00 but looks to have failed the initial test to establish itself above here.
An original version of this article can be viewed at Pound Sterling Live