Bearish options bets on the rand are at the highest in almost three years as traders start to question whether the South African currency’s headlong rally has further to run.

So-called risk reversals — the difference in cost between options to buy and sell the rand — are signalling concern about the currency after a historic 15% rally over the past year. While many investors remain bullish on the rand, the moves have gone so far that some are speculating the market is due for a pause, especially as investors brace for potential budget surprises this week.

The rand has been bolstered by soaring precious-metals prices, a stable and reform-driven coalition government and signs of an economic recovery. That’s left its real effective exchange rate at the most overvalued level in at least five years, according to the Bank for International Settlements.

“The market has already priced in much of the good news,” Deutsche Bank AG strategists Danelee Masia and Christian Wietoska wrote in a report. “Further gains will be dependent on concrete execution of the reforms rather than just sentiment.”

Three-month risk reversals for the rand-dollar pair climbed to 2.66 percentage points on Monday, the highest on a closing basis since May 2023.

A key hurdle on the immediate horizon is Finance Minister Enoch Godongwana’s annual budget, scheduled for Wednesday. Investors will want to see the government using potential revenue windfalls to reduce debt or increase capital investment, rather than current spending, according to Ruen Naidu, a portfolio manager at Ninety One Plc.

“The rand will bear the brunt of any disappointment,” he said.

Lower interest rates are another potential headwind. Markets are pricing in at least two 25-basis-point cuts from the South African Reserve Bank this year as inflation slows toward its 3% target.

Traders are also worried about who replaces President Cyril Ramaphosa as head of the ruling African National Congress when his term ends next year, and how that will affect the government. The country has seen months of political stability, which as boosted investor confidence.

“Foreign investors and capital flows would be likely to react negatively to domestic political uncertainty that might imply threats to the current coalition government or risks of a material shift in economic policies,” said Andrew Matheny, an economist at Goldman Sachs group.

Many investors remain bullish on the rand, expecting the budget to deliver on investors’ expectations including a possible reduction in local-currency bond issuance.

A survey of South African fund managers by Bank of America in the second week of February found respondents see the rand gaining to 15.47 per dollar over the next 12 months. The currency traded around 15.99 per dollar on Monday.

“It is hard to adopt an outright bearish view on the currency given South Africa’s strong terms of trade,” said Walter de Wet, an analyst at Nedbank Group, adding that any currency weakness should be seen “as an opportunity to lock in those attractive levels.”

Still, the rand has come a long way, leaving it vulnerable to a correction.

“The rand is coming off a year of strong gains, with the move large enough to have eroded the currency’s notable undervaluation,” said Lauren van Biljon, a senior portfolio manager at Allspring Global Investments. “While the rand has some support structures in place, it’s certainly not immune to a sustained deterioration in wider risk appetite.”