South Africa's volatile currency caught Citigroup Inc. in a wrong-way bet within a day.
The New York-based lender recommended a short-dollar position versus the rand on Monday, betting the South African currency would strengthen along with emerging-market peers as uncertainty around fiscal stimulus in the U.S. weighed on the dollar.
Instead, the rand plunged more than 2% on Tuesday as traders fretted about a resurgence in coronavirus infections and the possibility of stricter lockdown restrictions in South Africa, taking it above the level where it triggered a stop-loss on the position.
The odds were already stacked against the trade, based on historical data. The rand has weakened against the dollar in January in seven of the past 10 years, according to data compiled by Bloomberg.
“It takes a brave analyst to bet against dollar appreciation against ‘the rattler' in January,” said Warrick Butler, the Johannesburg-based head of foreign exchange trading at Standard Bank in a note to clients. That's “the nature of the beast,” he said.
Citigroup strategists including London-based Luis Costa entered the short-dollar trade at 14.52 rand, targeting a move to 13.57. Instead, the currency weakened beyond the 15.05 stop level on Tuesday and extended the decline Wednesday, slipping 0.9% to 15.1290 by 4:27 p.m. in Johannesburg.
Costa didn't immediately respond to Bloomberg's message seeking comment.
The next levels to watch for the dollar-rand cross are 15.15 and 15.35, with a breach of the latter signaling further losses to as much as 16.10, said Butler.
READ: Citi Enters Short USDZAR Trade on Hopes of Rand Outperformance
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