Traders Run for Cover as Storm Bears Down on South Africa's Rand

  • Currency’s implied volatility climbs as ANC conference nears
  • Leadership battle presents two-way risks: Standard Bank

SARB Didn’t Miss Chance to Cut Rates, Says Kganyago

South Africa’s notoriously volatile rand has been sailing into calmer waters in recent months, with price swings narrowing to the lowest level in almost three years. That’s about to change, options pricing suggests.

The rand’s three-month implied volatility against the dollar has soared relative to actual fluctuations as the ruling African National Congress’s leadership contest approaches, suggesting traders are paying up for protection ahead of an event that may introduce two-way risks for the currency.

The ANC, which has ruled South Africa since the end of apartheid in 1994, is in turmoil because of scandals that have shadowed Jacob Zuma, 75, during his eight-year presidency. The party is embroiled in a factional split between supporters of his ex-wife, Nkosazana Dlamini-Zuma, and Deputy President Cyril Ramaphosa, who are the leading candidates to succeed him. 

Even so, the rand has gained 1.5 percent against the dollar this year, shrugging off an economy in recession, the firing of Finance Minister Pravin Gordhan in March, two credit-rating downgrades to junk and allegations of corruption involving the politically connected Gupta family, who are friends of Zuma and in business with his son.

It may seem as if the market is ignoring the risks, but “the dollar-rand option market is showing rising uncertainty about the path of the rand after the ANC elective conference in December,” Walter de Wet, the head of foreign-exchange and fixed-income strategy at Standard Bank Group Ltd. in Johannesburg, wrote in a client note.

Read more about South Africa’s leadership race here.

While Ramaphosa’s campaign has focused on the need to combat corruption, Dlamini-Zuma has largely been silent on the issue and has echoed Zuma’s call for “radical economic transformation” to address racial income disparities dating back to apartheid rule. The deputy president has the backing of the country’s largest labor group and many investors.

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