ZAR: Sharp sell-off follows heavy carry trade build up – MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the biggest moves in the FX market so far this week has been the South African rand which plunged by over 4% against the US dollar from yesterday’s intra-day high.

Key Quotes

“It has resulted in the rand fully retracing gains from earlier this month driven by strong carry demand and the favourable initial reaction to municipal elections in South Africa which revealed a loss of popular support for the ruling ANC. The sharp rand reversal provides some confirmation that investors have been getting carried away during the recent search for yield. Excessive risk taking had resulted in the rand overshooting fundamentals which is now in the process of correcting

The sharp sell-off for the rand was triggered by a report yesterday that Finance Minister Gordhan received “correspondence” from a special police unit and is getting legal advice on the matter according to a National Treasury spokesperson. It follows on from reports earlier this year that Finance Minister Gordhan may face dismissal and arrest on espionage charges for setting up the South African Revenue Service’s National Research Group to spy on politicians including President Zuma. It has prompted some concern that the government could choose to loosen fiscal policy if Finance Minister Gordhan is removed in an attempt to boost popular support following the disappointing municipal election results. The government’s continued commitment to fiscal consolidation is seen as crucial in preventing a downgrade to junk status for South Africa. The credit rating agencies are unlikely to have much tolerance for running looser fiscal policy despite concerns over low growth.”