Investors are using the forward options market to increase bets that South Africa’s Deputy President Cyril Ramaphosa will win the race to become the next leader of the ruling African National Congress (ANC), positioning for a rally in the rand.
The leadership battle between Ramaphosa and Nkosazana Dlamini-Zuma, who has held several senior cabinet posts and is ex-wife of President Jacob Zuma, is too close to call with less than a month to go until the ANC’s December elective conference.
But indications that Ramaphosa – seen as more business-friendly than Dlamini-Zuma – is doing well in nominations by the ANC branches which send delegates to the conference mean investors are more confident he can win the race.
Options contracts expiring around Dec. 18, a day after the ANC is expected to reveal Zuma’s successor, are now commanding the highest prices, with some traders locking-in a rand exchange rate of 13.20 to the dollar versus today’s spot price of 13.70.
“Sentiment has definitely turned more positive for the rand. There’s a belief that Ramaphosa is a nose ahead of Dlamini-Zuma, even though the branch nominations aren’t cast in stone,” said Standard Bank’s executive head of rand trading Warrick Butler.
Implied volatility on one-month rand options contracts has fallen sharply since late last week, as this chart shows:
Implied volatility measures how much an asset such as a currency is expected to move in price. When it falls, investors believe a currency will follow a more predictable trajectory.
The rand’s fortunes have been closely tied to political outcomes over the past couple of years, with the currency rallying on any sign of an end to the corruption scandals and economic decline that have tainted Zuma’s time in office.
In August the rand gained around 2 percent when the parliament’s speaker allowed a vote of no-confidence against Zuma to be by secret ballot – though Zuma survived that vote.
Dlamini-Zuma, whose bid for the ANC’s top job is backed by her former husband, has alarmed some investors with talk of radical wealth redistribution.
Gillian van Heerden, a derivatives trader at Tradition Futures, said the volume of rand options traded on Monday was almost three times higher than the monthly average.
Investors are willing to pay a premium to protect themselves from big moves around the time the leadership is decided. The price of a one-month contract to trade the rand at a pre-agreed exchange rate on Tuesday was higher than options for other time periods, as the prices on this chart show:
Last week a poll showed Ramaphosa had secured the support of 65 percent of branches tallied, compared to Dlamini-Zuma’s 30 percent, which boosted appetite for the rand.
Over the weekend ANC officials in the Western Cape nominated Ramaphosa as their preferred candidate.
“The provisional results that came out on the weekend seem to lean towards Ramaphosa and that helped the rand strengthen yesterday, because he is seen as a change from the current administration,” van Heerden said.
She said market attention had shifted to the ANC conference after South Africa escaped a potentially painful double downgrade of its credit ratings last week.
The rand has been weighed down this year by political uncertainty and weak economic growth, which have triggered credit rating downgrades by all three major international rating agencies.