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Mere talk of Zuma ouster spurs bets on the rand

May 24 2017 23:10
Robert Brand, Bloomberg News

Johannesburg - Will he stay or will he go?

As leaders of the ruling party prepare to discuss a potential ouster of President Jacob Zuma, investors are turning bullish on the South African currency. Societe Generale, Credit Agricole and Citigroup are betting on a resurgence in the rand, which has lost 4% of its value since Zuma sparked a crisis with a Cabinet reshuffle.

Just talk that Zuma may be removed by the African National Congress has increased the appeal of the nation’s assets, according to SocGen strategists Jason Daw and Phoenix Kalen, who recommend selling the dollar for the rand and buying longer-dated bonds. The currency surged to a two-month high on Wednesday as debt yields dropped to the lowest since March.

READ: CPI, Zuma rumours push rand under R13/$

Opposition to Zuma’s rule has mounted within ANC ranks following his March 31 decision to fire Pravin Gordhan as finance minister, a move that prompted S&P Global Ratings and Fitch Ratings to downgrade the nation to junk. The party’s leadership will discuss Zuma’s future from Friday, according to two senior party officials who will be in attendance.

“The chances of Zuma being ousted are slim, but the fact that some members of the National Executive Committee are openly discussing the possibility has boosted sentiment toward South African assets,” the SocGen strategists wrote in a note on Wednesday. “A bullish stance on South Africa remains one of our highest conviction views.”

With the political crisis moving towards closure, signs of an economic recovery are also supporting the rand, said Guillaume Tresca, an emerging-market strategist at Credit Agricole who also  recommends going short-dollar versus the rand, targeting a move to R12 against the greenback. Zuma’s removal would add impetus to the currency’s gains after it slumped 10% in the wake of Gordhan’s dismissal and the credit-rating downgrades in April.

“The potential dismissal of President Zuma from the ANC is not fully priced in,” Tresca said. “It is not yet a done deal but any moves that put pressure on President Zuma will be seen positively by the markets.”

Carry potential

South Africa’s inflation rate fell to its lowest this year in April and will probably stay within the central bank’s target range, leaving room for policy-easing by the end of the year, Tresca said. Firmer borrowing costs and market liquidity make the rand an attractive proposition for carry trade, enabling the investment of borrowed dollars in higher-yielding currencies, he said.

The rand gained 1.2% to R12.9293 per dollar in late afternoon trade in Johannesburg, after strengthening 1.1% on Tuesday as Bloomberg reported the ANC leadership may discuss Zuma’s ouster. Yields on benchmark government bonds due 2026 dropped six basis points to 8.49%. Foreign investors bought a net R3.65bn of South African bonds on Tuesday, the biggest inflow since April 5.

READ: ANC leaders to discuss Zuma removal at NEC - Bloomberg

Not all market participants agree. There is little chance of Zuma leaving office anytime soon and a downgrade of China’s debt rating may affect prices for South Africa’s raw-material exports, Morgan Stanley analysts said in a note. Investors should be wary of “chasing the rally” in the rand, they said.

Even if Zuma stays in office until 2019, when his term expires, signals of dissent within the ANC will continue to support South African assets, according to Citigroup strategists led by Luis Costa, who recommended on Wednesday buying and writing dollar-rand put options, seeking to profit from a weakness in the US currency.

“It is still our base assumption that Zuma will stay the president of South Africa until 2019, but further signals of dissent within the ANC may warm up the Zuma trade once again,” the Citigroup strategists wrote.

With low rates in developed nations driving money to emerging-market assets, the rand’s “typical high beta should see it outperform many a peer”, they wrote.

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