ZAR: Stability ‘Trumped’ by US election - TDS

Cristian Maggio Head of Emerging Markets Strategy at TDS, notes that since Trump’s victory at the 8 November election, the EM currency momentum has turned bearish albeit unevenly and TDS is not surprised by the negative rand performance as USDZAR is both a high beta pair (so likely to react worse than EM FX peers during episodes of risk aversion), and a heavily oversold one.

Key Quotes

“ZAR is heavily overvalued on political risk having been priced out by the market. Economic and political risks, however, remain and USDZAR should move swiftly towards 14.50 to adjust for them. Over the course of 2017, however, we expect a more meaningful correction in the 15-20% range as the rand remains, even after the current correction, very much overvalued. Our USDZAR forecast for end-2016, Q1-2017 and Q4-2017 currently are 14.50, 15.85 and 17.00, respectively.”

“While we see no direct connection between Trump’s victory and the ZAR selloff, we think the election surprise may have been the trigger for a more realistic assessment of future economic/political prospects in South Africa, and a congruent valuation of the rand.”

“We like being long USDZAR at around 14.0 as long as the bearish EM FX momentum remains in place. The position, however, has negative carry of –62.4bps/ month and holding it without substantial spot moves in our favour can be costly. In addition, the market has also proved more supportive for the rand than we would expect this year.”

“Therefore, we prefer an RV position against the RUB, which also happens to be one of the top beneficiaries in the EM FX space, at least in relative terms, from the US election. In this case, we still target short ZARRUB at 3.50 with a stop at 5.1350, and stand ready to close the long USDZAR position, allowing the short ZARRUB to carry on, in case the EM FX momentum turns.”