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Macro and Vol Commentary

With risk-off sentiment hampering the recent rally for EM currencies, this week we look at USDZAR.

South African Data

  • The trade budget balance for South Africa significantly disappointed to the downside, coming in at –35bn Rand for April, the survey was at 13bn
    • The previous month was 23.9bn Rand
  • The monthly budget was equally as weak at -51.2bn Rand for April
  • ABSA manufacturing PMI improved in May to 50.2 from 46.5. The month on month improvement does not reflect a strength on a historical basis
    • The government allowed the underground mines to start running at 50% capacity and open cast mines, and oil refineries to increase to 100% on April 16th
    • We expect the manufacturing sector to oscillate between positive and negative territory but remain weaker on a historical basis
    • The mining sector will also start to improve
  • Mining production improved in April, to -47.3% y/y from 59.4% y/y in March, and -34.1% m/m from -59.3% in March
  • However, high-frequency indicators such as power consumption and production may be a more realistic representation of the economy
    • Electricity production for April -22.8% y/y
    • Electricity consumption for April -23.3% y/y
    • GDP in South Africa strongly correlated to electricity, but the drop off demand in demand should help Eskom
  • We expect the Rand to struggle with capital inflows from foreign investors after South Africa was downgraded to junk by Moody’s and S&P, and Fitch
    • This may result in funds seeking different homes, acting as a headwind to Rand
  • Risk aversion from a finance perspective form banks and lenders may weigh on South African businesses and households in the medium to long term
  • Weak consumer demand and falling wages will significantly impact retail sales. This may result in an increase in household debt levels in the longer term
    • Energy prices have fallen which will present headwinds to inflation
  • The threat of a second wave in the U.S. and China has damped market sentiment in the last week, halting the rally for risk assets, this is not conducive to business sentiment in South Africa

The central bank has cut interest rates recently, and we expect monetary policy to remain accommodating. The downgrading of the Rand will also prevent some funds flowing into the economy. Capacity utilisation has been weak recently, but this will start to bottom out and show signs of improvement on a month-on-month basis. The government is releasing a supplementary budget next week, and it has never been so important for this stimulus to hit the right tone. Following the GFC in 2008, globally, we saw large stimulus packages which failed to have the desired impact due to poor implementation. South Africa’s deficit will limit the ability to support the economy, banks have not injected the total support package into the economy, and we could see changes to the scheme next week to help improve allocations. In the immediate term, we expect headwinds to ZAR to prevail, but if risk appetite improved once again and the supplemental budget hits the spot, we expect USDZAR to weaken.

Volatility Commentary

Over the last few months, we’ve seen USDZAR implied and realised vol come off since the CV19 peak (as with most macro FX vols). Though with the global economy still fragile and lingering concerns of second waves, USDZAR vol is still trading higher than pre-CV19. We’ve seen over the last week a slight tick up in the spot, implied and realised volatility, as recent risk-off sentiments of a second wave being present, with the vol curve being inverted out to about 6 months. We favour slight long vol/gamma positions on USDZAR, and though we may see a short term continue in USDZAR rallying, we favour positions that favour a longer-term USDZAR weakening.

USDZAR Trade Idea

  • Both priced in 10m USD Notional
  • Buy Vanilla USDZAR Put with 16.00 strike with 6-month expiry for circa 127k USD upfront premium
  • To reduce upfront vol cost/premium offset this by selling Vanilla USDZAR Put with 16.00 strike with 2-month expiry for circa 39k
  • Overall trade has a premium cost of circa 88k USD

Charts and Tables

Technical Charts 

JP Morgan Global FX Volatility Index

The index held above the 200DMA this week keeping momentum on the front foot. However, the stochastics are falling and the MACD is negative and diverging on the downside. The index has remained supported despite the selloff in the indicators the index has held above the moving averages. Recent rallies have been sold off and to confirm the outlook of lower prices, the index needs to break below the moving averages and then support at 7.60. On the upside, if the index can hold above the moving averages and then target 10. We expect prices to soften in the immediate term.


Dollar Index

The index has improved in the last week after finding support below 96. The stochastics are rising towards the overbought territory, and the MACD diff is positive and diverging suggesting higher prices in the near term. Near term, trend support has held firm and to confirm the outlook of higher prices, to confirm the continuation pennant the index needs to take out-trend resistance. This would help confirm the bullish engulfing candle, with secondary resistance at 100 DMA. A target in the medium term is 98.601. On the downside, a rejection of the pennant trend resistance could trigger losses back through trend support to 96. The index needs to take out the recent low at 95.716 in order to regain downside momentum. Neat term momentum favours the upside but we could see prices fail into the 100 DMA as apprehension in the market increases.



The pair was well bid at trend support and this triggered a break above the 38.2% fib level at 17.0137. The stochastics are rising towards overbought and the MACD diff is negative and is starting to diverge. If support at the 100 DMA and the 38.2% fib level hold firm this could trigger gains towards the 200 DMA and the 23.6% fib level 17.9038. Conversely, rejection of prices at 17.30 could trigger losses through the 38.2% fib level before trend support. A  breach of trend support would help confirm the triple top around 17.30. The death cross in May was is yet to be confirmed but if the pair breaks through trend support, this may pave the way for lower prices to the 61.8% fib level at 15.5748.



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