FxWirePro: Glimpse on Semi-Annual Monetary Policy Report of SARB, Uphold USD/ZAR Debit Call Spread As Rand Looks Vulnerable

One week after Moody’s rating downgrade the rating agency Fitch has further downgraded its sovereign rating for South Africa, now taking it to two steps below investment grade, and has also given it a negative rating outlook. As a result, USD-ZAR reached a new high at 19.30. However, the rand recovered intraday on a wave of risk-on as a result of positive news regarding the corona pandemic from some regions. The pair temporarily slipped below 18.60. The rand is still at the mercy of hopes and fears surrounding the pandemic.

Yesterday the South African central bank (SARB) published its first estimate of the consequences of the pandemic and the lockdown on the economy. It estimates that the economy will shrink by between 2% and 4% in 2020. In addition, the budget deficit could rise to above 10% of GDP in the current fiscal year. According to the SARB that meant that it was getting close to levels last seen in times of war: 1914 the deficit quota amounted to 11.6%, in 1940 it reached 10.4%. 

At the presentation as part of the semi-annual monetary policy report SARB governor Lesetja Kganyago spoke of “nightmarish” forecasts. Regarding the rand he made it clear that the bank did not see the necessity for interventions as long as the markets worked in an orderly manner. The exchange rates were the result of supply and demand.
We assume that the times for the ZAR will get better again as soon as the light at the end of the tunnel gets brighter, until then, we keep positioned ourselves long in USDZAR via optionality. Hence, at this juncture (spot refence: 18.1313 level), we uphold our shorts in ZAR on hedging grounds via 2-month (17.43/19.40) debit call spread. Courtesy: Commerzbank