18 Dec

South African Rand Near 3-Month High on Ramaphosa Vote Optimism

South Africa’s rand fluctuated near a three-month high against the dollar and bond yields fell as traders bet Cyril Ramaphosa is poised to become the next leader of the ruling African National Congress.

Ramaphosa, one of the wealthiest black South Africans, has pledged to revive the struggling economy and stamp out corruption. His opponent, Nkosazana Dlamini-Zuma, has echoed President Jacob Zuma’s call for “radical economic transformation” to redistribute wealth to the black majority, a shift investors fear may blow out the budget deficit and spark rating downgrades.

The South African currency gained as much as 1.5 percent before trading 0.3 percent weaker at 13.1337 per dollar as of 10:04 a.m. in Johannesburg, according to data compiled by Bloomberg. Overnight implied volatility soared to a record 73 percent, suggesting traders are hedging for a large swing after the result, which may be announced Monday.

“Our base case of a win for Ramaphosa appears still to be on track, though there remains sufficient uncertainty in the process for caution to be exercised,” Zaakirah Ismail, a strategist at Standard Bank Group Ltd. in Johannesburg, wrote in a client note. “Volatility is also still at multi-year highs, implying that the currency is geared up for a sharp move after the winner is announced.”

Yields on benchmark government bonds due December 2026 dropped 14 basis points, the most since October, to 9.02 percent.

Long-Term Risks

The rand’s 4.1 percent gain over the past five days will probably not be sustained even in the event of a Ramaphosa victory as the country’s economic challenges won’t disappear, said Tsutomu Soma, general manager of the IFA department at SBI Securities in Tokyo.

“This isn’t likely to be a long-term strong rand trend,” Soma said. “Ramaphosa’s victory is seen as better than Nkosazana Dlamini-Zuma, but it will probably not improve the nation’s problems drastically, including fiscal positions. In the long run, the rand doesn’t look so attractive.”

Traders added bearish bets on the currency over the next three month, with the premium of options to sell the rand over those to buy it rising eight basis points to 2.83 percentage points in the past week.

Source: https://www.bloomberg.com/news/articles/2017-12-17/south-africa-s-rand-reaches-3-month-high-as-anc-prepares-to-vote