Zuma or no Zuma, traders see a wild ride for South Africa's rand

Will he stay or will he go?
It doesn’t matter as far as the rand is concerned, derivatives pricing shows, amid speculation about whether South Africa’s President Jacob Zuma will vacate office before Thursday’s scheduled State-of-the-Nation address to lawmakers. The currency’s world-beating rally has left it vulnerable to a selloff, regardless of who delivers the speech, analysts including Bank of America Corp. and JPMorgan Chase & Co. say.
Zuma’s days appear to be numbered, but investors are unsure exactly when he will go. Citigroup Inc. says the State-of-the-Nation speech "sounds like the perfect venue for this type of announcement.” But Zuma, whose nine-year rule has been mired in corruption and weak economic growth, is standing firm, ignoring pleas from senior members of the ruling African National Congress to step down.
Whatever his fate, options markets are pricing in tough times ahead for the currency, which has rallied 20 percent against the dollar since its one-year low on Nov. 13. The reaction to Cyril Ramaphosa’s election as leader of the ANC in mid-December was "excessive compared to any reasonable expectations” of what he could achieve should he take over from Zuma, according to JPMorgan Chase & Co.
Read more about South Africa’s leadership struggle here
These charts show that traders are becoming less sanguine about the rand’s prospects:
The rand’s implied, or expected, volatility against the dollar over the next three months has plunged since the ANC chose Ramaphosa as its leader. But at 14.6 percent, it’s still much higher than that of any of its peers, including Brazil’s real and Turkey’s lira, implying traders are hedging against wide price swings.
Credit Agricole CIB, which forecasts the rand to fall 11 percent to 13.5 against the greenback by the end of the year, says the currency’s risk premium in the spot market seems to have "disappeared.”
"Something’s gotta give,” analysts including Sebastien Barbe and Guillaume Tresca said in a Feb. 1 note. "Most of the positive news has been priced in already.”
It’s also more expensive to protect against rand weakening using put options than it is for any other major currency. The premium of contracts to sell the rand over those to buy the currency in the next three months, known as the 25-Delta risk reversal, has risen steadily since November.
While funds were more overweight on rand bonds in December than at any time since August 2013, they were increasing their foreign-exchange hedging at the same time, Standard Chartered Plc said last week.
The rand’s appreciation in the spot market "triggered a marked divergence from fundamentals,” Bank of America analysts including David Hauner and Ferhan Salman said last month, citing South Africa’s fiscal and economic challenges. The budget statement scheduled for February 21 "will hardly deliver good news,” they said.
Futures markets are also signaling that investors are cautious. Despite their delight over Ramaphosa’s rise to the top of the ANC, data from the U.S. Commodity Futures Trading Commission show net long positions in the rand have barely budged this year. Meanwhile, traders have increased long positions for Russia’s ruble and continue to hold more bullish contracts for the lira than they do for the rand.
French bank Societe Generale SA recommended to clients last month that they short the rand against the ruble, saying the former had strengthened too much "given the high hurdle for delivery on the tasks of restoring fiscal discipline.”
The rand has been the world’s most lucrative carry trade in the past past six months, returning 13 percent against the dollar. But it may struggle to sustain such gains, given that a transition to a Ramaphosa presidency has already been priced in, at least partially.
Moreover, that carry trade is best left to investors with a high threshold for risk. Adjusted for expected volatility, the rand’s implied carry returns over the next month are lower than that of its main competitors and less than half that for the lira.