With a monetary policy decision and a credit-rating review on the immediate horizon, not to mention market havoc caused by the coronavirus pandemic, traders can’t see a break ahead for South Africa’s rand.
One-month implied volatility for the rand versus the dollar surged on Thursday to the highest since the aftermath of the financial crisis. The premium of options to sell the rand over those to buy it over the next month, known as 25 Delta risk reversal, widened to the most in 18 months.
Much of the uncertainty lies in Thursday’s rates decision, with analysts almost evenly split between forecasting a 50-basis-point and 25-basis-point reduction. That would help counter the economic blow from the virus, but lower rates would also put further pressure on the rand as they erode South Africa’s yield advantage over US Treasuries.
And next week, Moody’s Investors Service is assessing its investment-level rating of South Africa’s foreign debt, just as restrictions on commerce due to the virus hit the economy as it struggles to emerge from a recession.
The government has no fiscal room to throw money at the problem. With bond yields now at record highs, borrowing more to spend itself out of trouble would be costly and arouse Moody’s ire. No wonder traders don’t want to touch the rand, which slumped close to a record low against the dollar on Thursday.