Rand volatility rises as investors turn bearish after Ramaphosa speech

Investors on Friday raised their bets on a weaker South African rand as the options premium for buying currency jumped and implied volatility rose to its highest in a month, just days ahead of the budget speech and national elections in May.

Read: Ramaphosa sets out plans to revive flagging economy

South African President Cyril Ramaphosa announced the election date in his state of the nation speech late on Thursday, where he also outlined plans to fix the economy. The president’s comments on the election triggered a rise in activity in forward markets.

One-month implied volatility rose 4.5 basis points to 15.05%, its highest since mid-January after beginning the week at a 9-month low.

The 25-delta risk reversals, the premium of options to sell the currency over those to buy it in the next month, rose to its highest since mid-January trading at 2.21%.

That bearish turn was reflected in the rand’s spot price, with the unit slumping overnight to its softest in one week at 13.70 per dollar.

Ramaphosa’s plans to fix the economy, including breaking up the state owned power firm Eskom, did not prevent markets turning bearish on the rand, with investors looking ahead to the budget speech on February 20 and May’s elections.

“What you’re seeing now is options markets positioning for additional volatility around that election period,” said strategist at ETM Analytics Jana van Deventer.

“Unfortunately, South Africa is at a point where talk is cheap and investors are waiting to see if the actions Ramaphosa has promised will actually be taken,” van Deventer said.

A monthly measure of business confidence released on Wednesday stalled with investors citing slow implementation of Ramaphosa’s promises to reform the economy.

The rand kicked off 2019 on a high and was the best performing currency against the dollar, netting a return of around 7% in the first month of the year as the United states central bank stepped back from its rate hiking cycle.

The tide has, however, turned in February, with flows into emerging market reversing and risks that saw the currencies suffer a torrid 2018 being priced back in, mainly over worries about global growth.

A Reuters poll this week found the rand was likely to lose about half of the gains made against the greenback since the start of the year over the next 12 months, pressured by fiscal constraints and weak growth.

“The rand’s ability to hold on to gains will likely be tested over the coming month,” said Mehul Daya, foreign exchange specialist at Nedbank, adding that the currency could weaken towards 14.00, a level last seen in early January.