FxWirePro: What is driving BRICS currencies and hedging vehicles (episode 2)

CNY: A trade clash is looming on the horizon. As a result, a few queries arise, such as, if the US wants to reduce its trade deficits with China, why don’t they remove the restrictions on the exports of high-tech products to China?

Well, it's valid, sounds appropriate, however, free markets are welfare-maximizing. Where the national security becomes the predominant motive of the trade protectionism policies, which sometimes makes economic analysis meaningless. Under the umbrella of “national security”, China has blocked Facebook for a long time, and the US levied tariffs on China’s products worth $ 50bn yesterday and plans to impose restrictions on China’s investment into US high-tech industries.

To be honest, all these will complicate the FX analysis. Luckily, the same market implication is drawn, both from the economic perspective as well as from the political perspective.

Here’s the economic one: if China’s trade surplus were to decrease dramatically, the renminbi would come under pressure to depreciate. And the political: China’s authorities would not allow the renminbi to strengthen, in a move to retaliate the US tariffs. Hence, at least we have a preliminary conclusion: There is a weakening bias for CNY.

Trading tips: The move is outsized in relation to the relatively modest adjustment in the spot (1.8% trough-to-peak intra-week), and was supposedly sparked by hedging of heavy CNH FX longs and typical low-delta USD call/CNH put protection buying from equity investors that in particular contributed to the skew move.

INR: The positive carry and the RBI’s more than adequate FX reserves should keep any periods of INR weakness bounded. As we progress towards the end of Q1 we also tend to see seasonal strength in the currency. Some retracement in commodity prices, particularly in terms of energy, has also provided some relief in terms of the extent to which the current account balance is likely to deteriorate.

The end-year forecast remains for USDINR to push above the 65.00 level.

ZAR: Ahead of South Africa's country rating by Moody's, on the markets, the expectancy is that South Africa would be able to avert a downgrade, at least for the time being. However, it is crucial for the South African central bank's decision on interest rates in the coming week. That is why the risk event is largely priced in, also in the still fixed margin. However, risks remain.

At the same time, recent surprisingly low inflation has fueled expectations of interest rate cuts. Overall, this suggests a subdued marginal appreciation in the event of a positive rating decision.

Stay short in USDZAR by buying 3m ATM -0.49 delta put options with a view to arresting downside risks.

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