Expensive lessons for rand traders as Gordhan battle rages
The wheels are coming off the rally in the South African rand.
The currency has swung to being the emerging world’s worst performer this month, from best in the third quarter, after a move to prosecute Finance Minister Pravin Gordhan sparked a sell-off of South African assets. Volatility has jumped to the highest among currencies tracked by Bloomberg, catching out investors and driving others to steer clear of South African markets until the political storm has passed.
The roller-coaster ride is testament to the depth of concern among investors over the battle between Gordhan and supporters of President Jacob Zuma for control of the nation’s purse strings. It also highlights the difficulty of assessing political risk in an emerging democracy such as South Africa, with some investors seeing recent events as a tipping point, while others regard them as noise that will blow over.
“The rand today is very, very hard to trade,” said Guillaume Tresca, a Paris-based senior emerging-market strategist at Credit Agricole SA. “On a daily basis, it’s a nightmare. You can have a rally for one or two weeks and it will perform very strongly, and all of a sudden you have a headline on the political risk and you can lose all your money in five minutes.”
In April, as risks to South Africa’s credit ratings rose and Zuma faced an impeachment vote, Credit Agricole forecast that the rand would weaken to beyond 16 to the dollar. Instead, it rallied to 13.2008 in early August.
The rand gained 7.3% against the dollar in the three months ended September, the most among 24 emerging-market currencies. It ended last week 4.2% weaker, lagging behind its developing country peers.
Foreigners dumped R14.3 billion-rand of the country’s bonds and stocks last week amid concern that Gordhan may lose his job. The currency plunged as much as 4.3% on October 11 after he was summoned to court on fraud charges. The next day, it gained as much as 2.5% as the head prosecutor said the charges could be reviewed. Volatility rose to the highest since June.
The rand is the world’s most-traded currency relative to gross domestic product, according to Renaissance Capital, with global volumes averaging about $51-billion every day, figures from the Bank for International Settlements show. Three-month implied volatility for the rand to the dollar, an indication of future price swings options traders expect, is the highest of 29 major and emerging-market currencies monitored by Bloomberg.
Traders paid the highest premium in three months for options contracts to sell the rand over those to buy it on October 11, as Gordhan was served with the summons. The three-month risk-reversal has since retraced to 3.6.
The rand gained a second day on Tuesday, strengthening 0.8% to 14.0419 per dollar by 12.02pm in Johannesburg.
The currency will weaken to 17 to the dollar by year-end after South Africa’s credit rating is cut to junk, said Peter Attard Montalto, an economist at Nomura International in London who says markets are underestimating the political risks that affect the value of South African assets.
“The volatility in forecasts just shows us it’s all ultimately down to personality politics at the end of the day, which is the worst sort and the hardest to factor in and forecast around,” he said. “This is the depth of intrigue and unpredictability, ultimately.”
Not everyone is bearish on the rand or staying on the sidelines. Standard Chartered said last week the “political noise” in South Africa is an opportunity to build “long” rand positions. Societe Generale SA last week upgraded the country’s debt to overweight.
Francois Botha, who helps oversee R15.5 billion of assets at Novare Investments in Cape Town, agrees that the rand’s volatility makes it wise to be cautious. Investors who moved funds out of South Africa after Zuma fired Finance Minister Nhlanhla Nene in December “got really hurt,” he said.
“It’s not the best move to react now, now that the currency has already been blown out,” Botha said. “We’re slightly more cautious because we’ve seen since the start of the year how the currency can react and it can appreciate quite a bit, and you don’t want to be caught on the wrong side of that.”