Rand set for highest close since September | Fin24

Rand set for highest close since September

Oct 31 2016 17:50
Xola Potelwa

Johannesburg - The rand advanced to the strongest in almost six weeks, leading global gains against the dollar on speculation South Africa may avert a debt downgrade this year after prosecutors dropped fraud charges against Finance Minister Pravin Gordhan.

The currency strengthened as much as 2.4% and was up 2.1% at 13.5550 per dollar by 15:36 GMT in Johannesburg, set for the highest close since September 27. The rand gained most among 31 major and emerging-market currencies against the dollar and headed for a second consecutive monthly advance. Bond yields fell to the lowest in three weeks and an index of bank stocks climbed the most in more than seven months.

South Africa’s markets were rocked last month after the National Prosecuting Authority summoned Gordhan to appear in court on November 2 on fraud charges the finance minister, who is embroiled in a feud with President Jacob Zuma, described as politically motivated. NPA head Shaun Abrahams said on Monday in the capital, Pretoria, that he had withdrawn the charges after reviewing evidence and representations. Rating companies have cited heightened political risks as credit-negative. The rand strengthened further after better-than-expected trade numbers.

“There’s relief,” George Glynos, the managing director and chief economist at ETM Analytics, said by phone from Johannesburg. “Across the bond market you’ve seen a de-risking of that market just simply because I think the market is going to price in Gordhan’s ability now to focus on the job at hand. That effectively could buy South Africa a little bit more time with the rating agencies.”

S&P Global Ratings and Fitch, which both rate South Africa’s debt at the lowest investment level, are due to review their assessments in December. Moody’s Investors Service, which puts the debt two levels above junk, is considering its view next month.

South Africa’s economy is forecast to grow this year at the slowest pace since a 2009 recession. While ratings companies might decide to delay a rating cut after the Gordhan news, a judgment based purely on economic fundamentals should result in a downgrade, said Roxana Hulea, an emerging market strategist at Societe Generale in London.

“The comments we heard after the all-important medium term-budget statement was indicative of the fact that both Fitch and S&P were quite critical of the poor growth perspective, poor growth outlook,” Hulea said by phone. “Gordhan has been very important, a sort of key man for South Africa keeping fiscal rectitude and they might be inclined to give the country a little bit more room after this news just came out. But I’m not convinced that political risk with this news is over.”

Trade boost

The nation’s trade balance unexpectedly swung to a R6.7bn ($494m) surplus in September as imports of products including oil declined. The account was R8.9bn in deficit in August.

Government 10-year bonds extended Friday’s gains, with yields dropping 16 basis points to 8.72, the lowest on a closing basis since October 10. The cost of insuring the country’s dollar-denominated debt against non-payment using credit-default swaps declined 12 basis points to 242.

Against the euro, the ran rallied 2.3% to 14.8588, the highest since August 16. One-week implied volatility on the rand rose for a fourth day on Monday, climbing 53 basis points to 20.63% and the most among 28 major and emerging-market currencies, suggesting options traders are anticipating wider price swings in coming days.

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