FxWirePro’s USD/ZAR strangle short fetch desired yields, short hedges on track of functionality as budget adds-in along with SARB, Moody’s and political tantrums

Before we emphasize anything much on this write-up, we urge you to go through our previous post this pair which is available on below website:

https://www.econotimes.com/FxWirePro-South-African-political-turmoil-stimulates-rand--USD-ZAR-short-hedge-and-write-strangle-for-trading-1090240

Well, shorting strangle options strategy was advocated about a fortnight ago, USDZAR is the recommended pair to sell DNTs in early January when the political noise was published; the above chart explicitly shows that the underlying spot FX convincingly breached its barriers over the advised period. Thereby, desired yields are certain by the way of initial premiums received.

While the South African central bank (SARB) assumed a cautious wait and see approach yesterday as expected. It left its key rate stable at 6.75% and adjusted its inflation outlook to the downside. The reason behind the latter was the stronger rand.

As expected it remained cautious when adjusting the rate outlook for 2018 and 2019 due to the risks for the rand and continued to signal a little less than two rate hikes until year-end 2019.

It stressed in its statement that the rand will remain susceptible to political uncertainty. It explicitly referred to Moody’s decision on a rating downgrade that will be taken following the presentation of the budget on 21st February. It was interesting to see that at 5:1 the rate decision was not unanimous: one member voted for a rate cut.

The news had hardly any effect on the rand, like other EM currencies it benefitted from continued USD weakness. We remain skeptical and urge investors to be cautious not least due to the continued political risks.

On hedging grounds, we would like to maintain shorts in USDZAR (post-February 2018 budget announcement) by buying 3m ATM -0.49 delta put options with a view to arresting downside risks.