currency up by 3.3% on Monday.
South Africa’s rand is living up to its reputation as the world’s most volatile currency.
Having been dealt what should have been a crippling blow by S&P Global Ratings on Friday, sparking a 2% slump, the currency advanced as much as 3.3% on Monday, on track for its best day since December 2015, after Moody’s Investors Service retained its investment-grade rating on the nation’s local-currency debt.
The reprieve by Moody’s meant South Africa retains its position in Citigroup’s World Government Bond Index for now, even though the company said it may cut the assessment after the February budget. An exit from the index would spark forced selling of local bonds by investors that track the gauge, leading to outflows of much as $10 billion, according to Societe Generale.
“I’m really surprised” by the rand’s gains, said Arnaud Masset, a market analyst at Swissquote Bank. “Moody’s decision to hold fire offset, somehow, the negative signal sent by S&P.”
Options traders pruned their short-term pessimism on the South African unit as it rebounded. The rand’s expected swings against the dollar, based on one-week and two-week contracts, fell by the most since 2006. It was heading for the first close stronger than its 50-day moving average since October 13.
The rand was also buoyed by news that President Jacob Zuma had committed to fiscal responsibility, vowing to cut spending and raise taxes to plug a R40 billion ($2.9 billion) budget gap.
The currency strengthened 3.2% to 13.71 per dollar as of 3:52pm in Johannesburg. Local-currency bonds due December 2026 gained, with the yield falling 12 basis points to 9.22%, after increasing as much as eight basis points earlier.
“I think this reaction is very much in line with our predictions, in the event of one agency cutting the ratings,” said Cristian Maggio, head of emerging-markets research at the Toronto-Dominion Bank. “Although, I must admit, it’s even faster than I would have expected.”
S&P lowered South Africa’s local-currency rating one step to BB+, one level below investment grade, and placed it on a stable outlook. Its assessment on the foreign-currency debt, which it already considered speculative, was taken down one notch to BB. Moody’s opted to keep both readings on Baa3, its lowest investment grade, but put them on review for a possible downgrade.
The currency has been on a roller-coaster ride this year as political infighting curbed efforts to boost Africa’s most industrialized economy. Since Finance Minister Pravin Gordhan was fired in March, the nation’s foreign-credit grade was cut to junk by two ratings companies and economic growth stalled.