South Africa’s Rand Suffers From Deepening Virus Crisis

(Bloomberg) --

South Africa’s rand is feeling the effect of the country’s worsening coronavirus crisis.

The currency has weakened for five straight days -- the longest streak in five months -- as the country contends with a more infectious strain of the virus, surging infections and difficulties in procuring vaccines. That’s despite a broadly supportive external environment, with the dollar under pressure and commodity prices rising.

The rand is already the emerging world’s biggest loser versus the dollar in 2021. It weakened 1.9% to 15.3510 per dollar by 4:18 p.m. in Johannesburg, bringing its year-to-date losses to 4.2%, twice the 2.1% decline of the next-worst performer, Brazil’s real.

“The main explanation is related to worries regarding the mutation of the virus and risks for serious lockdowns in the country,” said Hans Gustafson, a Stockholm-based emerging-market strategist at Swedbank AB. “The external environment is very positive for the rand with the dollar trending lower and precious metals zooming. If those conditions disappear, the rand is very vulnerable.”

The country has only recently secured a deal to receive its first coranavirus vaccines, but barely enough for the country’s 1.25 million health workers. President Cyril Ramaphosa and his cabinet are considering tightening lockdown measures, which have already devastated Africa’s most industrialized economy, with the central bank forecasting that gross domestic product will contract 8% in 2020.

• South Africa reported a record 21,832 new Covid-19 infections on Wednesday, 21% higher than the previous peak, bringing the cumulative total to 1.15 million
• The number of people who’ve died after being diagnosed with the disease rose by 844 to 31,368

South Africa’s internal headwinds may weigh on the rand this year to a far larger extent than was the case in the fourth quarter, when investors were simply using the currency as a proxy for emerging markets, said Piotr Matys, a London-based strategist at Rabobank in a note to clients.

The rand rallied 14% in the three months through December - the most in a basket of developing-nation currencies tracked by Bloomberg.

“Given that market participants are likely to be far more selective in 2021, the underperformance of the rand witnessed so far in January could be an initial signal of what is to come in the coming months,” Matys said.

Derivative traders are signaling that the next month may be bleak: the premium of options to sell the rand in the next 30 days over those to buy it, known as the 25-delta risk reversal, has climbed to the highest since May.