What Volatility? Rand's Eerie Calm Belies Political Storm Ahead

The world’s most volatile currency has been rather well-behaved lately, considering the enormous risks lurking around the corner.

South Africa’s rand has traded in a tight range in the run-up to the ruling African National Congress elective conference, set to start at the weekend. Historical volatility has dropped below the one-year average, and the currency is up 0.8 percent against the dollar this month, adding to November’s 3.1 percent gain. 

But that should not lull investors into a false sense of security. With one-week implied volatility soaring to a two-year high of more than 35 percent, odds are that the “surprising stability” won’t last, Rand Merchant Bank currency strategist John Cairns wrote in a client note Tuesday.

“Rand trade might be boring now but it is expected to be explosive” after the weekend, Cairns wrote. Options prices suggest that the market now sees a more-than-50 percent probability of a 5 percent move in the rand in the wake of the leadership vote, to under 13 or over 14.30 per dollar, Cairns said. The currency traded at 13.5922 per dollar by 12:38 p.m. in Johannesburg. 

“Interestingly, this pricing puts the odds of sharp rand gains as similar to those of sharp rand losses,” he said.

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