Finance Minister Pravin Gordhan will present the new budget to parliament today. That means the conflict between Gordhan and President Jacob Zuma will enter the next round. So as to convince the rating agencies and ensure that South Africa’s rating will not be downgraded to junk status Gordhan has to demonstrate that the government has got its spending under control.

Zuma on the other hand wants to rely on spending billions on nuclear power stations and “radical economic transformation” to fight racial injustice and poverty.

According to the local press Zuma is once again planning to dismiss Gordhan and to make Brian Molefe his successor. That would be an extremely negative sign for the markets and would put considerable pressure on the rand.

Overall, ZAR’s major as well as short term trend has been bearish bias, thus, at spot ref: 13.2717 we recommend below option trades.

While the changed political landscape suggests the medium term picture is shifting more positive, we remain tactically bearish ZAR.

Subsequently, on the option trade front among EMFX, we recommend positioning longs in USDZAR as the South African significantly overshooting fundamentals –

Long USDZAR portfolios that make us buying USD vols all the more appealing. Instead of naked vanilla call form we suggest call spread structure for the 2M horizon, optimizing strikes for leverage.

In USDZAR, the 1M-2M ATM spread is below average at +0.75, as 1M vols had remained relatively anchored and never softened significantly.

Therefore, the premium for owning US elections risk isn't punitive, and the short leg further mitigates the cost of gamma.

The above table explains how does the call spread is ordered in decreasing values of max payout/cost.

We find that skews aren’t steep enough vs ATM to allow for a wide range of strikes to be efficient. In order to ensure more than 50% discount to the outright vanilla, and a max payout/cost higher than 3.5:1, one needs to choose a combination of long 40D vs 25D.

Especially EURZAR is another interesting pair to consider as a Euro-contagion hedge given that implied vols there have collapsed to 2-years lows at par with delivered, and as one of the few currencies to withstand the gamma carnage this month.