How the SA election messed with the rand and drove crypto arbitrage crazy

The national elections played havoc with the rand in June, giving crypto arbitrage investors some spectacular profits in the process.

The graph that appears further down shows what happened in the month of June as it became clear the ANC had lost its majority and would either have to form a government of national unity (GNU) or build coalitions with opposition parties.

The rand veered between R19 and R17.87 to the US dollar, hitting its weakest point in early June as fears grew that a lurch to the left was on the cards for the ANC.

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It quickly corrected when it became clear a GNU encompassing the two leading parties – the ANC and the more business-friendly Democratic Alliance (DA) – would form the core of the new government.

The rand was all over the place for much of June, driven by rumours of aborted negotiations and then, finally, the announcement of an agreement with five parties representing 68% of the national votes forming the GNU: the ANC, DA, Inkatha Freedom Party (IFP), Good, and the Patriotic Alliance (PA). That news was money to investors, who pushed the JSE higher and propelled the rand below R18/$1 at one point. 

The ever-changing swings in sentiment played out in the crypto arbitrage market – where investors try to profit from price differences in different crypto markets.

The graph below shows the gross crypto arbitrage premium (in blue) swinging from 1% to 4.5% during the month. The crypto arbitrage premium represents the difference in crypto prices, such as bitcoin and USD-backed stablecoins such as USDC, on local and overseas exchanges. This crypto arbitrage premium is inversely correlated to the USD-ZAR exchange rate. 

“We’ve approached the halfway mark for this year, where the gross premium has yet again exceeded expectations, spiking above 4.5% and averaging above 2% with consistent profits above 1.6%,” says Andrew Ludwig, CEO of crypto arbitrage provider Currency Hub.

“It’s been all about the ZAR movements these past few months and election activity, both key drivers to the premium.

“It was an exciting month for all the markets, including equities, showing the correlation between politics, ZAR strength, and the [crypto arbitrage] premium,” he adds.

“Crypto prices had coincidently weakened over the last few weeks, also helping the premium. This meant some great trading opportunities, which the trading desk captured. The combination of these events, with the ZAR strength, creates a great environment for trading, and hopefully into July.”

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Says Harrison Scherzer, CEO of crypto arbitrage provider Future Forex: “Prior to the formation of the GNU, when the ANC lost its majority, the rand weakened, as did the [crypto arbitrage] spread.

“At one point the ZAR strengthened to around R18 to the USD, when the GNU was announced, and the spread improved to 3% and even higher.

“Recently the rand has tanked a bit again, which has pushed the spread back down to 2.2-2.3%, which means this is still a very good time to be in the market,” says Scherzer.

“There is an inverse correlation between the exchange rate and the crypto arbitrage spread. In other words, the stronger the USD-ZAR exchange rate, the higher the crypto arbitrage spread (or gross profit).”

All this suggests it is unwise to write the obituary just yet for the crypto arbitrage market. Volatility in the ZAR-USD exchange rate tends to kick it back to life.

The chart below shows an inverse correlation between the JSE All Share Index (red) and the ZAR-USD exchange rate (green) since the start of 2024. 

ZAR-USD v Alsi

This article was republished from Moneyweb. Read the original here.