Rand firms towards R14/$ despite looming national polls
Traders have reduced their expectations of weakness in the currency, with the risk reversal at a two-month low of 2.83% on Tuesday
Traders appear to be holding their nerve ahead of SA’s election on May 8, with the rand having settled into range-bound trade.
One-month implied volatility in the rand has dipped below its six-month average following an upbeat opinion on SA’s credit status by Moody’s Investors Service, according to Bloomberg data. Despite remarkable stability in the local currency, analysts warn this could evaporate should new catalysts emerge.
Traders have reduced their expectations of weakness in the currency, with the premium on options to sell the rand against the dollar over those to buy, known as the risk reversal, at a two-month low of 2.83% on Tuesday. This is also below the 3.5% it has averaged over the past six months.
One-month implied volatility in the rand had recently risen above three-month implied volatility, highlighting the market’s perception of risks in the near term, said Nedbank Corporate and Investment Banking analyst Reezwana Sumad.
However, a number of emerging markets will be holding national or local elections in coming months, she said. “With the rand trading within the R14/$ and R14.50/$ range, we are comfortable that local and external risks are being better reflected in the currency. We believe any break out of this range is unlikely to be sustained.”
At 1.40pm, the rand had gained 0.52% to R14.0377/$, 0.38% to R15.8264/€ and 0.43% to R18.3513/£. The euro was 0.13% firmer at $1.1274.
The rand has gained 4.89% on its worst level of 2019, R14.7495/$, reached on March 28.
The recent range of 10c was “uncanny” for the local currency, given the volatility seen so far in 2019, said Standard Bank currency trader Warrick Butler.
“The rand has a habit of doing this though, the proverbial calm before the storm,” he said.
Global trade on Tuesday was somewhat subdued; however, events on Wednesday threaten to inject volatility into global currency markets. These include an EU summit that will address Brexit, a European Central Bank policy announcement and the release of US Federal Reserve minutes.