FxWirePro: South African political turmoil stimulates rand – USD/ZAR short hedge and write strangle for trading

The South African President Jacob Zuma seems to be on a seesaw succeeding the ANC party conference in December burdens for him to quit or his dismissal from office are getting more and more vociferous. These gossips about his premature departure caused USDZAR to ease from levels above 12.45 to around 12.30. Today the first ANC meeting under its new leader Cyril Ramaphosa will be held. According to information from top party officials proposals for an early departure of the

President would be discussed, the official period in office will end in mid-2019. A bitter power struggle is likely to be taking place within the ANC behind the scenes, as the new ANC leader and the party’s most likely Presidential candidate for the elections in 2019 will hold the usual inaugural speech to celebrate the ANC foundation on 8th January 1912 in which he will set the governing party’s course for the year – and thus the government’s priorities. This is where he will need support.

He is likely to do everything in his power to reduce Zuma’s influence and to facilitate a rapid end to his time in power. That is rand positive, and if he was to be successful, new lows in USDZAR below 12.25 are feasible.

However, Jacob Zuma has proven that he is unlikely to simply step down. This week is likely to be an interesting one, with increased volatility in rand exchange rates.

Stay short in USDZAR (post-February 2018 budget announcement) by buying 3m ATM -0.49 delta put options with a view to arresting downside risks.

Alternatively, on trading grounds, naked strangle shorting is also recommended: Short 2W USDZAR OTM put (1.5% strike difference referring lower cap) and short OTM call simultaneously of the same expiry (1% strike referring upper cap) (we reiterate, preferably short-term for maturity is desired).