South Africa’s rand is cheap for good reason, according to Union Bancaire Privee.

The rand’s real effective exchange rate, which measures its inflation-adjusted value relative to the currencies of its main trading partners, has dropped to the lowest level since March 2016, according to a JPMorgan Chase & Co index.

But that doesn’t mean the currency is poised for a rebound, said Peter Kinsella, the London-based global head of forex strategy at UBP.

“On my old trading desk, there were two rules,” Kinsella said in a note to clients. “The first rule was that you were not allowed to buy rand. The second rule was to always remember the first rule. This anecdote gives some idea about the long-standing nature of structural rand weakness.”

The rand’s implied volatility is more than 20% on a one-month and three-month basis, second only to Turkey’s lira in a basket of emerging-market currencies tracked by Bloomberg.

The premium of options to sell the currency in the next month over those to buy it, known as the 25-Delta risk reversal, has risen 92 basis points in April.

It’s now at 5.50 percentage points, suggesting that investors expect even more weakness from the rand.

The rand is already the biggest loser versus the dollar in risk currencies this year, down more than 25%, after a credit downgrade to junk by Moody’s Investors Service added to concerns about the government’s debt levels as it battles to support the economy amid the spread of the coronavirus.

The currency declined 0.3% to R18.76 per dollar by 2:13 p.m. in Johannesburg.

The South African Reserve Bank has cut its policy rate three times this year to an all-time low, reducing the rand’s yield advantage. The economy is headed for a contraction of 6.1% this year, the central bank estimates.

“In the absence of materially higher growth and or higher carry, a rand recovery is going to be difficult,” said Kinsella, said.

“The bottom line is that risks remain skewed” toward rand weakness, he said.

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