Overnight, at one point the South African rand lost over 9% of its value, the biggest move since October 2008. The currency did recover, trading now down just 2.3%. At its lowest, the spot was trading at 17.9169 to the USD, before coming back to 16.51. Implied volatility for the 1 month at the money option moved up to 24.69% , a rise of 4.62%. The reason for this huge move seems to be risk aversion, poor liquidity with a combination of stops and margin calls.
This kind of currency volatility is not new for the African country. In December last year the rand also suffered a major decline when the President, Jacob Zuma, dismissed his finance minister Nhlanhla Nene and replaced him with unknown backbencher David Van Rooyen. The President then reversed the decision 4 days later and replaced Van Rooyen with former finance minister Pravin Gordhan. None of this helped market confidence, which along with a global slump in commodity prices has led to tepid economic growth over the last few quarters. In 2015 the South African currency slumped 25% versus the USD.
Nhlanhla Nene’s sacking did not trigger the collapse and continued weakness in the currency according to Zuma. He said in a bullish interview this morning “The rand had been going down when Nene was there, it had been going down for months and months,” adding "I think people did not understand, I think that there was an exaggeration in terms of the reaction, there is no single person that can collapse a department, particularly a department like the Treasury".
On the back of the currency decline and inflation forecasts bets are increasing that the Reserve Bank will raise rates by more than the 25 basis points that were being priced in on Friday. The next policy meeting is on the 27th and 28th January. Forward rates are now pricing in approximately 40bps of hike.
For clarity, we do not hold the South African rand and never have held the currency in any of our portfolios.