JOHANNESBURG, Dec 18 (Reuters) - The rand extended gains to a more than two-month high on Tuesday after markets took the re-election of President Jacob Zuma to head the African National Congress as positive for investment.
The mood was compounded by the choice of businessman Cyril Ramaphosa to be his deputy.
Re-election to the party post almost ensures Zuma another five-year term as president of Africa's biggest economy and investors were cheered by the certainty and perceived stability created by the result.
The rand firmed to 8.5226 after the announcement. By 1557 GMT it hit a session best of 8.5125 as local equities closed at a new record high. Hopes for a resolution to the U.S. fiscal cliff crisis also boosted markets.
Analysts said the choice of millionaire businessman and former mining union leader Ramaphosa as deputy president would make the ANC more business friendly. It was unlikely, however, that there would be changes made to South Africa's rigid labour laws.
Investors will watch the rest of the ANC meeting, which ends on Thursday, for any changes to policy, such as mines nationalisation.
Deputy Finance Minister Nhlanhla Nene said on Monday the government would not be "reckless" with implementing new mining taxes.
"The Nene comments yesterday were particularly worrying as they seemed to be saying to the market and to investors there will be some policy shifts on the mining issue," said Peter Attard Montalto, an emerging market analyst for Nomura.
Nene accused ratings agencies of trying to influence the outcome of the ANC conference after Moody's and Standard & Poor's downgraded South Africa's ratings partly on expectations of political instability.
Analysts expect that Fitch will cut South Africa's rating at its next annual review in January.
Bonds firmed with the rand on the day, with yields dropping 2.5 basis points on the 2015 issue to 5.4 percent, while the 2026 yield gave up 3 basis points to 7.315 percent.
Yields bounced from resistance barriers on Friday and dealers said the rally had been quite hard and profits would be taken from that.
Danske Bank said it had cut its weighting on South Africa debt this month compared with November.
"We are pretty negative here, as both the deteriorating external imbalances and the risks for further downgrades from the rating agencies represent clear risks for a weaker rand," said Lars Christensen to clients on Tuesday, adding that South Africa's currency was "fundamentally over-valued".
Offshore accounts dumped South African debt in favour of equities last week, selling a net 381 million rand ($45 million) in bonds and buying nearly 2.8 billion rand in shares, data from the Johannesburg Stock Exchange showed.
Analysts said bond inflows for the month were sitting well below average and equity inflows were outdoing debt for the fist time in seven months.
"Bond flows are reversing despite local bonds remaining resilient, which speaks to the manner in which foreigners are taking cues from rising Treasury yields," ETM analysts said in a note.