Rand bulls can probably breathe again.
The cost of hedging against price swings in the South African currency over a one-month period plunged more than 120 basis points - the most in the world - on Wednesday, after Finance Minister Tito Mboweni assured investors the government would not take beleaguered power-utility Eskom's debt on to its books, as many had feared.
That’s helped restore the currency’s status as one of the premier carry targets in emerging markets after a bout of heightened tension began to eat away at the rand’s yield appeal. Concern that Moody’s Investor Service will downgrade the nation’s debt over a worsening fiscal outlook at a review on March 29 had pushed the implied volatility gauge to its highest level in over a month last week.
While the risk of a sovereign downgrade still remains - the government is planning a R69 billion cash injection in the company over the next three years, under strict conditions - rand traders are taking it all in their stride for now. The currency led an advance across emerging-market currencies on Thursday, rising as much 1% to 13.8744 per dollar.
“There might be just enough to convince Moody’s to treat the action as a credit-neutral event rather than a credit-negative,” Johannesburg-based analysts at Rand Merchant Bank wrote in a note to clients on Thursday, referring to the government’s plan for Eskom. “It will be a very close call.”
The rand’s one-month implied volatility inched 1 basis point lower on Thursday to 15.73%, hovering around a one-week low touched Wednesday.