Rand roller-coaster: Get set for big swings as ratings agencies, ANC cast their votes – analysts

qnEDINBURGH — Analysts are expecting the South African rand to provide a bumpy ride until the end of the year. The first possible dip will come as ratings agencies cast their votes on the state of the country at the end of the week. Another rating downgrade will deter foreign investors and will most likely contribute to the withdrawal of funds from the South African market. But, there is light on the horizon for the currency. A victory for Cyril Ramaphosa in the ANC presidential succession race is likely to provide a fillip for the business community, though the risk remains that President Jacob Zuma will succeed in installing his ex-wife, Nkosazana Dlamini-Zuma. After the toppling of Zimbabwean despot Robert Mugabe this week as a result of a similar move to hand over the baton to his wife, Grace, it’s looking less likely that ANC leaders would be as stupid as to give the Zumas their way. – Jackie Cameron

By Paul Wallace

The rand’s roller-coaster ride isn’t over yet — but traders appear uncertain about whether it’s heading up or down.

The South African unit, which has swung from being the best- to the worst-performing major currency against the dollar this year amid political tension and a faltering economy, is set for more volatility, based on options contracts.

One-month dollar-rand implied volatility soared to the highest in two years on Wednesday as traders hedged for big moves either way in the run-up to the ruling African National Congress’ leadership election in December. The premium of options to sell the rand over those to buy it — known as the risk reversal — has dipped, however, suggesting traders are taking some bearish bets off the table even as hedging remains skewed toward the currency weakening.

An employee holds South African Rand notes in this arranged photograph in London, U.K. Photographer: Jason Alden/Bloomberg

Reports that Deputy President Cyril Ramaphosa, investors’ favorite candidate, is leading the race to take over as ANC leader from President Jacob Zuma have buoyed the rand. A win for Ramaphosa would be “hugely market-positive,” while a victory for Zuma’s ex-wife Nkosazana Dlamini-Zuma, the other main contender, would send the currency down, according to Societe Generale SA.

The leadership contest — which culminates in an elective conference from 16 to 20 December — isn’t the only risk in coming weeks. Investors are bracing for a possible downgrade of the government’s local-currency rating to junk on Friday, when Moody’s Investors Service and S&P Global Ratings publish reviews.

The companies assess South Africa’s local debt at one level above junk, and a cut by either could lead to the nation’s exclusion from Citigroup Inc.’s World Government Bond Index. That may cause as much as $14 billion of outflows, according to Bank of America Corp.

Read also: SARB’s SHOCK revelations! Billions leaving SA illicitly while NPA fails to act.

It’s all reducing the currency’s attractiveness for carry traders, who borrow dollars to invest in higher-yielding assets. Adjusted for volatility, implied returns for the dollar-rand trade over the next month have fallen to the lowest in almost six years, according to data compiled by Bloomberg.

Despite the potential for swings either way, analysts, like derivative traders, still see the rand depreciating. The median forecast for the exchange rate at the end of the first quarter next year has weakened to 14.28 per dollar, from 13.4 since September, according to a Bloomberg survey. That suggests the rand may drop another 2.9 percent by then, extending its loss since March to 13 percent.

Foreign investors are already turning cold on South African bonds, data from the Johannesburg Stock Exchange show, with daily outflows over the past month averaging 134 million rand ($10 million). Should they accelerate, that would add pressure on the current-account deficit and the rand. 

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