South Africa's Eskom Plan Was the Boost Rand Bulls Needed
(Bloomberg) -- Rand bulls can probably breathe again.
The cost of hedging against price swings in the South African currency over a one-month period plunged more than 120 basis points -- the most in the world -- on Wednesday, after Finance Minister Tito Mboweni assured investors the government would not take beleaguered power-utility Eskom Holdings SOC’s debt on to its books, as many had feared.
That’s helped restore the currency’s status as one of the premier carry targets in emerging markets after a bout of heightened tension began to eat away at the rand’s yield appeal. Concern that Moody’s Investor Service will downgrade the nation’s debt over a worsening fiscal outlook at a review on March 29 had pushed the implied volatility gauge to its highest level in over a month last week.
While the risk of a sovereign downgrade still remains -- the government is planning a 69 billion-rand ($4.9 billion) cash injection in the company over the next three years, under strict conditions -- rand traders are taking it all in their stride for now. The currency led an advance across emerging-market currencies on Thursday, rising as much 1 percent to 13.8744 per dollar.
“There might be just enough to convince Moody’s to treat the action as a credit-neutral event rather than a credit-negative,” Johannesburg-based analysts at Rand Merchant Bank wrote in a note to clients on Thursday, referring to the government’s plan for Eskom. “It will be a very close call.”
The rand’s one-month implied volatility inched 1 basis point lower on Thursday to 15.73 percent, hovering around a one-week low touched Wednesday.
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