Current market dynamics in the options sector suggest that South Africa’s rand is poised for a rebound that could mirror the rapid decline it experienced in December.

As it stands, the rand is on track for its worst December performance since 2015, coinciding with its most significant quarterly decline in over two years. This downturn follows an unprecedented and swift liquidation of long rand-dollar futures by hedge funds during the week ending 17 December, when net long contracts plummeted from 27,927 to a mere 1,422, according to the Commodity Futures Trading Commission.

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However, with the rand having erased all its gains from 2024 and hovering at its lowest value since the May elections, options traders expect that the underlying factors that supported its rally before December will reemerge after the New Year.

The six-month risk reversals — which show the difference in premium between options to sell versus those to buy the currency — are currently at an all-time low. Furthermore, the premiums for one- and three-month options are also approaching historic lows.

This trend indicates that the cost of hedging against further depreciation of the rand is now more economical than it has been in years, implying that the turbulence witnessed in December may have come to an end.

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Since Wednesday (25 December), the rand has shown signs of strengthening after temporarily surpassing R19 against the US dollar. By midday Sunday, it was trading at approximately R18.70.

© 2024 Bloomberg

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