South Africa’s most recent political ructions have proved to be just noise for rand traders.
The currency is leading peers in an advance against the dollar in the past month, even as President Cyril Ramaphosa faces accusations of campaign-finance ethics and a judicial panel continues to hear evidence of widespread corruption in government and state-owned companies.
In the past, political turbulence such as the sacking of finance minister Nhlanhla Nene in 2015 and the ousting of Jacob Zuma as President of the African National Congress in December caused rand volatility to spike. This time round, investors are more concerned with the Federal Reserve’s policy path and the outlook for the local economy, according to BNP Paribas.
“The South African political drama is relatively benign in the context of the last few years and in relation to the country’s peers,” said Nic Borain and Shaun Daly, analysts at BNP Paribas, which recommends a long-rand position and sees fair value for the currency at 13.50 per dollar.
“We do not expect domestic politics to trigger market shocks, whether to the downside or upside, with the impetus likely to be much more from the domestic macroeconomy, including global factors affecting all emerging markets.”
The rand has gained 2.8% since June 21 and traded at 13.91 per dollar by 11:14 am in Johannesburg. Three-month implied volatility has dropped to a 15-month low, suggesting traders anticipate price swings to moderate in coming months.
Hedge funds have boosted long-rand positions versus the dollar to the highest in more than a year, the latest data from the Commodity Futures Trading Commission show.
The cost of insuring South Africa’s government debt against non-payment dropped to the lowest in 15 months in the past week. Five-year credit-default swaps traded at 159 basis points on Monday.
Foreign investors are regaining their appetite for the country’s bonds amid a chase for yield. Non-residents bought a net R1.8 billion of government bonds in the week to July 19. That’s the first week of net inflows in four.
The premium investors demand to hold South African sovereign bonds rather than US Treasuries is the lowest since July of last year, according to a JPMorgan Chase & Co. index. The sovereign spread has declined 30 basis points to 273 over the past month.
© 2019 Bloomberg L.P.