1. FX Outlook
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Macro and Vol Commentary

After the annual BRICS meeting in Johannesburg this year, what is the outlook for South Africa, Africa's most industrialised economy?


South African Economy

  • While recent GDP data came above expectations, South Africa faces headwinds due to continued electricity load-shedding and a poorly functioning transportation sector that drags on exports.

    - Q2’23 GDP growth was at 1.6% YoY, as the economy grew by 0.6% in the three months to June, above expectations of 0.3% and higher than first quarter 0.4%.

    - Trade surplus of R16 billion in July was a significant improvement from trade deficit recorded the month before but remains well below R154 billion trade surplus recorded for the same period in 2022.

    - The reduction in trade surplus could lead to further devaluation of the rand as the country acquires foreign currency to pay for increased imports. 
  • Demand conditions continue to stabilise, but consumer sector remains weak. 

    - June retail sales data came below expectations, pointing to a 0.9% YoY decrease in consumer activity. 

    - The unemployment rate dropped marginally in Q2’23 to 32.6%, which remains one of the highest unemployment rates in the world. 
  • At the same time, business activity expanded for the first time in a year, but high inflation and load shedding remain obstacles to growth. 

    - Manufacturing production came in higher than expected, growing by 5.5% YoY in June compared to 2.5% YoY a month before. 

    - The recent S&P Global South Africa PMI increased to 51, pointing to the first expansion in private sector activity in six months 

    - While CPI softened in July, slowing from 5.4% to 4.7% YoY, recent oil price surge risks stoking a fresh wave of inflation. 
  • At the last meeting in July, South African Reserve Bank (SARB) decided to halt interest rate hikes, keeping the rates at 8.25%. 

    - As a result, the rand weakened, and, while SARB policymakers announced that further hikes might be necessary, the markets are now pricing out interest rate hikes. 

    - By sticking to this stance, we expect that the SARB is creating a buffer against potential pricing pressures stemming from elevated oil prices that could materialise in the last quarter of this year. 
  • Moreover, severe power rationing and logistical networking constraints continue to weigh heavily on economic performance. 

    - State power utility Eskom has this year implemented its heaviest power outages to date. 

    - At the start of September, Eskom announced that load shedding will be escalated to stage 6 indefinitely. 

    - This month marks a year since the country saw a full week without load shedding as the country was subject to blackouts for all but one 24-hour cycle this year. 

    - Load shedding is likely to keep input costs elevated over the longer run, supporting the inflation stickiness narrative. 

The outlook for the South African economy is still patchy, despite some positive data releases suggesting improved business activity and growth. The spring is coming, easing some of the pressures off the national grid, but the sentiment remains lacklustre as the South African economy continue to face complex issues surrounding its energy sector. Like other EM currencies, the rand have suffered by the risk averse global financial market environment, particularly concerns over China’s growth prospect as it remains South Africa’s biggest trade partner. Given the current economic landscape, the USD should remain the key driving force behind the currency movement. As the dollar edges higher as the last man standing, we expect further depreciation of the rand and the USDZAR testing 19.3 level. 


Sources: S&P Global, Statistics South Africa 

Volatility Comment

There are several risk and vulnerability present in the south African economy resulting in a deteriorating near term economic outlook. Double digit Food inflation, unemployment remaining stubbornly high, China woes curtailing commodity exports all while debt to GDP ratio continues to grow. The net effect off all this is likely to see the Rand continue to depreciate. Implied Volatility is at an attractive level to sell, especially given it has been realising constantly below implied Vol this year. Therefore, given our view on the cross the best play in our opinion will be to sell upside Straddle.

USDZAR 1-month Realised and Implied Volatility

Realised Vs Implied (14)

USDZAR Trade Idea

  • SELL Straddle
  • 3m Expiry
  • 1mio$ straddle receives circa 83K$

Positioning Charts

EURUSD Vanilla Positioning Data 24/08/2023 - 31/08/2023

EURUSD option expiries pointed to growing downside momentum in the week ending September 7th, with the number of puts growing and the downside cover extending into 1.02. At the same time, the number and size of put notional reduced, suggesting a growing appetite for lower levels. The size of the expiries is seen growing by the end of September and into October, in time for the central bank interest rate decisions. We expect to see further softness in the near term.

Eurusd 24 31

EURUSD Vanilla Positioning Data 31/08/2023 - 07/09/2023

Eurusd 31 7

USDCNY Vanilla Positioning Data 16/08/2023 - 23/08/2023

Appetite for USDCNY options grew in the week ending on September 7th, especially for expiries for the longer end of the curve. The number of puts now exceeds calls, suggesting that the upside trend might be slowing. Still, both upside and downside cover grew to 7.65 and 7.00, respectively, highlighting that the conviction is not certain. Indeed, while the number of puts grew recently, the size of the notional indicates a lack of strong appetite for lower prices. We expect the pair to hover around the current levels in the near term.

Usdcny 24 31

USDCNY Vanilla Positioning Data 24/08/2023 - 31/08/2023

Usdcny 31 7

USDZAR Vanilla Positioning Data 24/08/2023 - 31/08/2023

Option expiries for USDZAR remained broadly unchanged in the week ending on September 7th. Expiries for the near- and far-end of the curve were reduced, and most of the activity is set to take place in Q4 2023. The number of calls is slightly greater than that of puts; however, the notional size is large in the 19.00-19.50 range, where the market sees a strong resistance, a breach above which could trigger further gains.

Usdzar 24 31

USDZAR Vanilla Positioning Data 31/08/2023 - 07/09/2023

Usdzar 31 7

Charts and Tables

FX Expiries

Expiry (58)

Historical Spot FX Volatility (30D Rolling)

Chart (47)

FX Matrix (today)

Spot (105)

Weekly Change

Week (87)

Key Events & Releases

Calendar (120)



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