South Africa’s rand could be set for a rebound after hedge funds triggered a dramatic sell-off of long rand-dollar futures, in one of the steepest positioning reversals in recent history, according to a report by BNN Bloomberg.
Citing data from the Commodity Futures Trading Commission, hedge funds reduced their net long positions from 27,927 contracts to just 1,422 in the week ending December 17.
The liquidation of futures contracts in mid-December led to the currency’s worst December performance since 2015 and its sharpest quarterly drop in over two years.
Despite the sell-off, the rand has erased all of its 2024 gains and is hovering near its weakest levels since the May elections. However, options traders are betting that the fundamentals that fuelled the rand’s pre-December rally will resurface after the New Year.
Key indicators, such as six-month risk reversals, which measure the premium of options to sell the rand over those to buy it, are at record lows. Similarly, one- and three-month risk reversals are also approaching historic lows. This suggests that the cost of hedging against further rand declines is now cheaper than it has been in years, signalling that the December shakeout may be over.
At the end of last week, the rand increased by 0.5%, trading at 18.7463 per dollar in Johannesburg, after briefly surpassing the 19 mark on Wednesday 25 December.
