South African Bonds Extend Decline With Rand on Gordhan Disputeby
Currency's implied volatility rises to two-month high
Investors fear finance minister's position not secure
South Africa’s rand led declines among emerging-market and major-currency peers, dragging bonds to the weakest level in seven weeks as a standoff between Finance Minister Pravin Gordhan and police investigating the tax authority undermines investor confidence.
The rand dropped as much as 2 percent against the dollar, taking declines this week to 6 percent and heading for the weakest close since Feb. 26. It was the worst performer among 31 emerging-market and major currencies tracked by Bloomberg on Wednesday. Bonds extended a three-day slump, with yields on benchmark government securities due Dec. 2026 climbing as much as 11 basis points before pulling back to trade 3 points higher at 9.47 percent by 3:24 p.m. in Johannesburg. The yield has jumped 35 basis points this week, the most after Brazil out of 27 developing nations tracked by Bloomberg indexes.
Investor fears are mounting that Gordhan’s job is in jeopardy after a police unit said it would use its legal powers to force him to answer questions in their probe. His departure could spell disaster for an economy threatened with recession and a credit rating downgrade to junk. Also weighing on local markets is uncertainty ahead of the Federal Reserve’s interest rate decision later on Wednesday.
“Bonds are following the currency and the political influence in that," Marten Banninga, head of trading at Worldwide Capital, said by phone from Johannesburg. “That nervousness is caused by the political uncertainty, nothing else. That’s what political influence does, you move away from being in sync with your peers.”
President Jacob Zuma reappointed Gordhan in December as finance minister, a post he had held from 2009 to 2014, to help rebuild investor confidence damaged by Zuma’s decision to fire Nhlanhla Nene and replace him with a little-known lawmaker. The Directorate for Priority Crime Investigation, a police unit known as the Hawks, on Tuesday said Gordhan, 66, missed two deadlines to answer questions relating to the tax agency that he led before 2009 and indicated it will force him to comply. Gordhan has described the Hawks’ statements as “threatening” and as harassment, while Zuma has said the probe should go ahead.
“It seems that Gordhan has never been fully accepted in his post, and we would not be surprised if he were eventually pushed out,” Marc Chandler and Win Thin, strategists at Brown Brothers Harriman & Co. in New York, said in an e-mailed report Wednesday. “To state the obvious, markets would not take that well.”
The rand weakened 1.4 percent to 16.1535 per dollar by 4:43 p.m. in Johannesburg. The South African currency could reach 17 per dollar if it breaks above 16.24, a so-called retracement level, Chandler and Thin wrote. The rand’s three-month implied volatility against the dollar jumped 62 basis points to 20.58 percent, the highest since January, as options traders anticipate wider price swings in coming months.
The public spat between Gordhan and the police comes a week after he met with investors during an international roadshow to the U.K. and U.S. to allay fears of a credit-rating downgrade. Standard & Poor’s has a negative outlook on its BBB- rating, one level above junk. Moody’s Investors Service, which rates South Africa’s debt one step higher, put the nation on review last week for a cut.