Picture: REUTERS
Picture: REUTERS

Investors are developing thick skins when it comes to political risk in SA. The currency is among the world’s 10 best performers this year, despite speculation that President Jacob Zuma may fire Finance Minister Pravin Gordhan.

Just 14 months ago, Zuma sent the currency crashing when he removed the respected Nhlanhla Nene from the post. The rand barely moved when Zuma’s annual state of the nation address in Parliament last week sparked violence with riot police firing stun grenades outside.

Now, Ebury Partners, the top rand-dollar forecaster over the past four quarters, thinks it’s unlikely Zuma will put markets through another "Nenegate". Investors are more concerned about faster-than-expected rate increases in the US and President Donald Trump’s trade policies, although those risks have improved the outlook for precious metals as traders seek safe havens.

This is coupled with general positive sentiment across commodities as companies benefit from rising pricing across the sector, from iron ore to coal, which is good news for SA

Buy signal

If there’s another political blowout in SA, there would probably be a sell-off in the rand, but that could be a signal for investors to buy the currency, said Kevin Daly, a London-based money manager at Aberdeen Asset Management, which oversees about $11bn of emerging-market assets.

Swissquote Bank agrees. "It would be a short-term risk-off trade in the rand, but in the longer term it would purely be an opportunity, in my book, to reload long on the rand," said Peter Rosenstreich, the head of market strategy at Swissquote in Gland, Switzerland. "The market is well aware of the political situation in SA."

Zuma’s feuds with Gordhan have caused periodic spikes in credit default swap contracts, which some investors use as a gauge for risk. Gordhan was under investigation over the early retirement of a former colleague at the South African Revenue Services (SARS), but the charges were dropped in October.

While political tensions persist, and Gordhan is still being investigated for allegedly overseeing a spy unit at SARS, the nation’s credit default swaps this week declined to the lowest level since December 2014.

"Good carry"

This week, the rand was on its longest winning streak since September, breaking through key barriers. It appreciated as much as 1.6% to 12.9044 to the dollar on Wednesday, the strongest level since August 2015.

Rosenstreich says idiosyncratic risks are taking a back seat to the broader appetite for carry trades, when investors borrow where rates are low and invest in higher yielding assets. "The rand is one of those currencies that has very little political Donald-Trump-tweet-exposure, so it makes it one of those ideal currencies," he said.

While the rand is the world’s most erratic currency, according to its one-month implied volatility, the measure on Wednesday dropped to levels seen before Zuma dismissed Nene in December 2015.

Rand probe

The implied volatility jumped the most in three months on Thursday, after SA’s anti-trust investigators urged that banks, including HSBC and BNP Paribas, be fined for manipulating trades in the currency. The rand fell 0.8% to 13.0254 to the dollar as of 1.37pm in Johannesburg.

"The only way they would manipulate the market isn’t in direction, it’s in charging more than they should on the spread," said Stephen Bailey-Smith, an investment strategist at Global Evolution Fonds. "It doesn’t change the direction of the rand" and it won’t spark a sell-off, he said.

Local problems do pose risks, said George Herman, the head of South African portfolios and asset allocation at Citadel Investment Services, which oversees about $3.2bn, but the main drivers for the currency are external, "even in a year of South African political issues".


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