Rand Stages Biggest Drop Since Late May as Cabinet Picks Awaited

(Bloomberg) -- South Africa’s rand staged its biggest drop in nearly a month as investors awaited an announcement by President Cyril Ramaphosa about who would be appointed in a new cabinet after agreeing to form a broad coalition with opposition parties.

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The currency fell as much as 1.5%, the steepest drop since the aftermath of the elections on May 30, to trade at 18.24 to the dollar. The yield on benchmark bonds rise 13 basis points to 11.3%.

The currency pared some of the losses after the African National Congress released a statement saying that phase two of the establishment of South Africa’s government of national unity, which includes appointing a cabinet, is well under way. “It is the ANC’s wish to see that these processes are not unnecessarily delayed, so that the 7th administration can get on with” urgent tasks, it said.

The announcement is expected in the coming days following negotiations to form a so-called government of national unity since the ANC lost its parliamentary majority in May 29 elections. Seven political parties accepted the offer and agreed to back Ramaphosa’s reappointment as president in exchange for being allocated other posts.

Warrick Butler, head of foreign exchange trading at Standard Bank of South Africa, said the week has started off with some nervousness around the announcement and “as with any uncertainty within points of influence, the market doesn’t take it well and so the rand has started off on the back foot,” he said.

“We have yet to see strong demand for South African assets from the offshore real money community and I expect this will change if we get some decent news regarding the cabinet. So, I will continue to fade any weakness,” Butler said.

But the decline Monday failed to wipe the rand off the top spot as the world’s best performing major currency in June. It gained more than 3% this month and this year has bucked the broader weakening of emerging-market currencies against the US dollar.

The worst of the uncertainty seems to be over. One-week implied volatility has plummeted from 21% the day before the election, to 13.75%. Risk reversals remain skewed in favor of the dollar, but have slid from a multi-year high of 4.63 percentage points in the vote aftermath, to 1.54 percentage points, near the one-year average.

The new administration is under pressure to tackle power shortages and logistics snags that have curtailed economic growth and investment, and fueled already sky-high unemployment.

(Updates with statement on developments in third paragraph.)

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