Ahead of the country’s sixth general elections of the democratic era, the rand was stuck in a tight range, ignoring turmoil in Turkey’s markets, as traders waited to see what the results will signal for President Cyril Ramaphosa’s reform drive.
SA’s currency gained 0.2% to R14.4421/$ by 5.28pm on Tuesday. It was down 0.6% from its close on Friday. The rand gained 0.3% to R16.1571/€ and was 0.5% stronger at R18.8451/£.
The currency has given up recent gains that pushed it below R15/$ in April. Since reaching a 2019 high of R13.2362, it has dropped about 9%.
Recent declines have been largely attributed to polls that have given mixed signals on the outcome, with the final SA Institute of Race Relations (IRR) survey showing that support for the ANC could drop to less than 55%. Such an outcome would likely spook investors, who have said a big mandate is needed for Ramaphosa to face down populists in his party and pursue pro-growth policies.
That anxiety is reflected in measures showing that investors don’t expect the period of relative calm to persist. At 15.1%, the rand’s one-month implied volatility against the dollar is only bettered by Turkey, while derivatives traders have increased hedges against weakness in the currency.
While the market expects an ANC majority, “the domestic currency is possibly holding back on worries that this may not be a strong majority result, resulting in the ANC entering some coalitions, particularly in Gauteng”, said Annabel Bishop, chief economist at Investec.
The rand’s relative calm on Tuesday, partly a consequence of a pick-up in sentiment globally on reports that a Chinese delegation will travel to Washington this week for trade talks, came despite new volatility in Turkey.
As one of the most heavily traded emerging-market currencies, the rand tends to suffer when there is turmoil elsewhere as investors reduce their holdings of SA assets to limit their exposure to riskier markets overall, some of which they can’t easily exit.
Turkey’s lira and stock markets dropped after the country’s electoral body nullified Istanbul’s municipal elections held in March and ordered a re-run. President Recep Tayyip Erdoğan’s party narrowly lost that vote.
On SA, the tone among investors is “increasingly cynical” that the election will herald a big change in the direction of the economy, Citigroup economist Gina Schoeman wrote in a note prepared after meetings in London.
An ANC win in the region of 57%-59% will see Citi take a “slightly constructive view” because that could result in a more capable state, which is a pre-condition for reform. “Yet our medium-term view remains realistically bearish until reforms are actually announced with clear implementation timelines,” she wrote.
The dimming outlook is also shown in in the derivatives market where the extra yield that investors pay for one-month options to sell the rand against the dollar, compared to those for buying it, was at 2.62 percentage points, up from a 2019 low of 2.07% in February.