Get set for 'explosive' rand trade next week

The world's most volatile currency has been rather well-behaved lately, considering the enormous risks lurking around the corner.

The rand has traded in a tight range in the run-up to the ANC elective conference that starts on Saturday. Historical volatility has dropped below the one-year average, and the currency is up 0.8% against the dollar this month, adding to November's 3.1% gain.

But that should not lull investors into a false sense of security. With one-week implied volatility soaring to a two-year high of more than 35%, odds are that the "surprising stability" won't last, Rand Merchant Bank currency strategist John Cairns said this week.

"Rand trade might be boring now, but it is expected to be explosive" after the weekend, said Cairns. Options prices suggest that the market now sees a more-than-50% probability of a 5% move in the rand in the wake of the leadership vote, to under R13 or over R14.30 per dollar.

The currency traded at R13.59/$ in Wednesday afternoon trade.

"Interestingly, this pricing puts the odds of sharp rand gains as similar to those of sharp rand losses," said Cairns.

The rand was slightly firmer after the release of better than expected consumer inflation data for November - with the consumer price index eased to 4.6% in November from 4.8% in October.

An uptick in inflation is negative for fixed-income assets such as bonds as it reduces their future returns. Government bonds were steady, with the benchmark 10-year bonds bid at 9.29% from the previous day's 9.26%.

Markets were waiting for the US interest-rate announcement later in the day, with what is expected to be a hawkish statement from the Federal Reserve and its forecast on future interest rate increases.

Most emerging market currencies were slightly firmer ahead of the Fed's announcement. An interest rate increase in the US could see capital flight away from emerging economies.

- Bloomberg, BusinessLIVE