Supplementary Budget 2020

SA's Eskom plan was the boost rand bulls needed

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.

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