Johannesburg - Options traders are signaling a tough time ahead for South Africa’s rand, already trading at a 14-year low.
The spread between the rand’s three-month historical volatility, a measure of actual price swings, and implied volatility, which gages expectations of future price fluctuations, widened to 4.02 percentage points this week, the most since January 2014, according to data compiled by Bloomberg.
South Africa’s currency slumped to its weakest level since December 2001 on Wednesday, weighed down by a decline in commodity prices, slowing growth in China and the prospect of a Federal Reserve interest-rate increase as soon as next month. An electricity shortage and persistent fiscal and current-account deficits are fueling the decline.
“The market is pricing in more pain than is actually prevalent in market conditions,” Warrick Butler, a rand and emerging-markets currency trader at Johannesburg-based Standard Bank, Africa’s biggest rand trader, said by phone. “This deterioration of the rand isn’t going to go away anytime soon.”
The rand declined 0.3 percent to 12.9199 per dollar by 7:29 am in Johannesburg after threatening on Wednesday and Tuesday to breach 13 per dollar for the first time since 2001. Rising implied volatility suggests it may reach that level soon, falling as low as 13.25, Butler said.
‘Slowly degrading’
While the currency’s three-month historical volatility dropped 1.9 percentage points to 10.10 percent this quarter, the lowest since November, implied volatility, based on prices for options to buy and sell the rand, measured 14.14 percent on Wednesday.
The price premium on options to sell the currency versus those to buy it, called the 25 Delta risk reversal, has climbed 55 basis points since the beginning of July to 3.2 percentage points.
“There’s this continuation of things slowly and slowly degrading and the currency is reflective of that,” Butler said. “We have nothing in the pipeline that would be positive for South Africa.”
The South African Reserve Bank may have to raise interest rates to help halt the rand’s decline, he said. The central bank lifted the policy rate 25 basis points to 6 percent on July 23 and warned that rand weakness was the biggest risk to the inflation outlook.
“The rand is at such elevated levels and volatility is so low it indicates that interest rates are too low,” Butler said. “They need to push interest rates higher.”
BLOOMBERG