Goldman Sachs bets against the rand
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Johannesburg - Goldman Sachs’ global markets team has identified shorting the rand as one of its top trades for this year due to falling commodity prices and South Africa’s current account deficit.
According to the businessinsider.com, the rand and the Chilean peso were both identified by Goldman as shorting opportunities in 2016 as both are major metals producers.
To short a currency is to sell that unit with the aim of making a profit when the price of that currency falls. To go long is to buy a currency with the expectation that the asset will rise in value.
South Africa is one of the world’s largest producers of commodities including platinum, palladium, gold, coal and ferrochrome.
Chile is the world’s biggest copper producer.
Trades in the two currencies rank as Goldman’s top three 2016 trades.
The top trade is to go long on the US dollar and short on the euro and yen due to the move by the US Federal Reserve hike rates as the European Central Bank and the Bank of Japan maintain loose monetary policy.
The rand was yesterday quoted at R16.4036, which was 2.17 percent firmer than late trade on Tuesday.
On Monday, the rand spiked to a record weakest level against the dollar of R17.9169, which meant the rand has depreciated by as much as 16percent since the end of last year.
The latest trend of weakness in the rand started in 2011 and it also forms part of a greater trend of overall weakness, with its roots in the 1980s.
Isaac Matshego, a Nedbank economist, said the rand would be under a lot of pressure this year due to economic conditions globally, where sentiment was against emerging markets.
“The move by the US to raise rates will put emerging market assets under pressure, especially those with weak fundamentals like Brazil, Russia, Turkey and South Africa,” Matshego added.
Finance Minister Pravin Gordhan’s Budget speech on February 24 will be watched very closely.
“The minister will have to do a very good balancing act,” Matshego said.
“It is going to be a very tough period for the rand over the next year at least. The rand is going to be very vulnerable and volatile,” he said.
George Glynos, the managing director and chief economist at ETM Analytics, said the Goldman Sachs’ view that the rand should be shorted was “potentially simplistic” as the rand was a cyclical currency.
However, Glynos said he was bearish about the local currency for the next three to six months, but then he was expecting the cycle to change.
“Once South Africa offers value then the foreigners will come back,” Glynos added.
If South Africa continued to score own goals then the US dollar could easily depreciate to R19 to the US dollar, he said. Glynos said he expected South Africa to fall into a recession in the first half of this year.