Rand runs as investors raise stakes on Ramaphosa win

Johannesburg - The market appears to be backing only one horse in the African National Congress’ leadership race.

The rand surged to the strongest level against the dollar in more than three months, bond yields fell and bank stocks climbed to a record as traders bet Cyril Ramaphosa is poised to become the next leader of the ruling party. That increases the risk of a selloff if Ramaphosa’s opponent, Nkosazana Dlamini-Zuma, pips him to the post, according to Medley Global Advisers.

“The market is assuming that Ramaphosa’s won, which is brave because the race is really close,” said Nigel Rendell, a senior analyst at Medley in London. “It’s being too cavalier. Even if Ramaphosa wins, he’s not the answer to all of South Africa’s problems.”

Ramaphosa, the nation’s deputy leader and one of its wealthiest black people, has pledged to revive the struggling economy and stamp out corruption. Dlamini-Zuma has echoed her former husband President Jacob Zuma’s call for “radical economic transformation” to redistribute wealth to the black majority, a shift investors fear may blow out the budget deficit and spark rating downgrades.

The South African currency rose as much as 2.4% before paring gains to trade 2.2% up at R12.8145/$, the strongest since September 7 on a closing basis, as of 13:56 in Johannesburg. Overnight implied volatility soared to a record 73%, suggesting traders are hedging for a large swing after the result, which may be announced later Monday. An index of bank shares rose 4.4%.

The best scenario from investors’ point of view would be a win for Ramaphosa, with Human Settlements Minister Lindiwe Sisulu becoming his deputy, Rendell said. In that case, the rand would probably appreciate further to R12.50/$, Rendell said. If Dlamini-Zuma wins with David Mabuza, the premier of the eastern Mpumalanga province, as her deputy, the currency may fall to R16 in a week, he said.

Bank shares

Yields on benchmark government bonds due December 2026 dropped 22 basis points, the most since March, to 8.94%. South Africa’s benchmark equities index advanced 0.4% as the stronger rand and higher bond prices boosted sentiment toward lenders. Shares in companies that benefit from a stronger rand fell, curbing the main gauge’s gains.

“The positive reaction of the rand in the last few days will filter through to some of the names on the market,” said Nolwandle Mthombeni, an analyst at Mergence Investment Managers in Cape Town. Lower bond yields are “very positive for the banks and give them instantaneous momentum,” she said.

The rand’s 5% gain since Friday - the biggest two-day move in two years - will probably not be sustained even in the event of a Ramaphosa victory as the country’s economic challenges won’t disappear, said Tsutomu Soma, general manager of the IFA department at SBI Securities in Tokyo.

“This isn’t likely to be a long-term strong rand trend,” Soma said. “Ramaphosa’s victory is seen as better than Nkosazana Dlamini-Zuma, but it will probably not improve the nation’s problems drastically, including fiscal positions. In the long run, the rand doesn’t look so attractive.”

Traders added bearish bets on the currency over the next three months, with the premium of options to sell the rand over those to buy it rising 30 basis points to 3.15 percentage points.

“Our base case of a win for Ramaphosa appears still to be on track, though there remains sufficient uncertainty in the process for caution to be exercised,” Zaakirah Ismail, a strategist at Standard Bank Group  in Johannesburg, wrote in a client note.

“Volatility is also still at multi-year highs, implying that the currency is geared up for a sharp move after the winner is announced.”

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