(Bloomberg) -- Traders in South Africa's rand seem to be holding their nerve a month before general elections. Their confidence may be misplaced, measures of volatility suggest.
The currency has traded in a 50-cent range since March, and measures of actual and implied volatility have dropped below their long-term averages. The rand is also the best-performing emerging-market currency this month, up 2.4 percent against the dollar.
But that should not lull investors into a false sense of security, according to Nedbank Group Ltd.
“FX volatility across most tenures remains below the three-year average -- complacency is high,” Nedbank strategists Mehul Daya and Walter de Wet wrote in a note to clients. Recent gains in the rand, spurred by the global dovish tilt in monetary policy, could turn to a steep correction as local risks come into play, they said.
“Attention will no doubt move increasingly towards the upcoming general election,” the strategists wrote. “We would not be surprised to see rising volatility and a rand that trades closer to the upper band of our trading range, and even towards the 15 level.”
The rand's implied volatility versus the dollar, based on prices of options to buy and sell the currency, has been higher than realized volatility since early February. That suggests traders are anticipating wider price swings as the election approaches.
Most polls are predicting a comfortable win for the ruling African National Congress under President Cyril Ramaphosa's leadership, but even with a strong mandate, Ramaphosa will face difficulties in introducing reforms that would stimulate the economy, consolidate government spending and reduce corruption.
To contact the reporter on this story: Colleen Goko in Johannesburg at cgoko2@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Robert Brand, Rene Vollgraaff
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