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Macro and Vol Commentary

The South African currency has taken back some of the losses incurred from the rise in US treasury yields, but what is next?

Government Finances 

  • According to the South African Reserve Bank, National government debt totalled 75.2% of GDP as of September 2020, up from 62.2% in January 2020; government debt is expected to reach 953% of GDP in 2025/26.
  • The government had to allocate the Medium Term Budget Policy (MTBPS) allocated resources towards the recovery plan.
  • In the last 5 years, real spending growth has averaged 4.1% p.a. but debt growth has averaged 1.5% p.a.
  • The fiscal deficit was expected to reach 15.7% of GDP in 2019/20, narrowing to 10.1% in 2020/21, with the debt stock expected to reach 81.8% of GDP in 2020/21.
  • The worst-case scenario is a lack of attention to the fiscal position, and sovereign debt default, the benefits from government spending on GDP has diminished in recent years.
  • South African debt is expected to increase in the coming years; the medium-term expenditure framework (MTEF) suggested adjustments amounting to 1.2% of GDP in 2021/22 and 1.9% in 2022/23.
  • Coal rents account for 2.4% of GDP, according to ING, but the correlation between ZAR and coal is weak at the moment.
  • Platinum has a better correlation with ZAR USD at 0.434, still not statistically significant. The p-value is 0.769, which again is not statistically significant.
  • Tax revenue for 2020 was R99.6bn, which should ease the government's pressure to raise taxes. The government withdrew increases of R40bn

Economic Data

  • GDP was -4.1% in Q4 2020, with annualised growth at 6.3% Q/Q for Q4 2020.
  • The South African economy is expected to grow at 3.3% in 2021 and 2.2% in 2022.
  • The current account, as a percentage of GDP, declined to 3.7% in Q4 2020 from 5.9% in Q3 2020.
  •  The current account balance was R198bn, down from R297bn.
  • Mining production was 4.5%m/m in January but remained down y/y at 6.2%. Platinum production was -14.5% y/y, which was an improvement from the previous month at -19.4% y/y.
  • Manufacturing production was up 0.5% m/m in January but remained negative on year on year basis at -3.4%.
  • The Absa manufacturing PMI was 53 in February, which was an improvement on the previous month at 50.9.
  • The more robust expansionary reading was due to greater export sales and the loosening of lockdown restrictions.
  • The latest budget proposed a cut of R300bn to the wage bill in the public sector; this was from a cut of R160bn in 2020 and R143bn in the medium term.
  • Expenditure has declined to 3.5% of the budget, down from 6.8% in 2019, but the latest budget estimates an annual growth of 1.2% in the medium term.
  • Negotiations are likely to start later this year; we do not expect this to be an easy negotiation, and if the budget and expenditure could trajectory could change as a result of these negotiations.
  • Unemployment rose to 32.5%, we employment to improve in 2021 as the economy recovers, but the social grants end in April, which will prompt significant damage to South Africa citizens, especially as grant spending will increase less than inflation.
  • The combination of wage negotiations and reduced social grants could present a significant downside to the employment rate, consumer confidence, consumer demand, and the probability of unrest could be high. If the government amend their budget, this could cause a deterioration in ZAR.
  • CPI stands at 3.3% y/y for January, and we could see this continue to edge higher but more cost-push instead of demand-pull.

The economic conditions in South Africa continue to present downside risk for ZAR, and we expect the USD to strengthen against the currency. While we expect economic conditions to recover, the government debt levels will continue to rise, but the government deficit is key to the economy. Exports demand for raw materials such as coal, iron ore and platinum will remain prevalent as demand for metals and infrastructure expenditure remains strong. Unemployment levels are high, but public sector wages negotiations and the reduced social grants could cause civil unrest. Higher US yields and a change in course from the Fed are likely to cause ZAR to weaken in the longer term. Liquidity in the pair remains low, and if inflation continues to rise, we could see South African interest rates rise, helping the carry trade. However, fundamentals for the economy remain weak, and we expect ZAR to struggle against the dollar.

Volatility Commentary

Over the last few months, we have seen USDZAR vol generally realise below implied, though we note a slight pick up in the last few weeks as the market has seen a few risk-off days and strengthening in US yields and the USD. We prefer holding slight long vol/gamma positions on this pair, and as mentioned above, with USD rising yields and economic conditions in South Africa showing potential for ZAR weakening, we suggest a trade benefiting from USDZAR moves upwards in the section below.

USDZAR Trade Idea

  • 10m USD notional, 2-month expiry Buy USDZAR EKI Call option with strike 15.0000 and barrier 15.5000 for circa 261k USD, for reference vanilla equivalent circa 288k USD
  • 10m USD notional, 2-month expiry Sell USDZAR Call option with strike 16.0000 for circa 101k USD
  • Overall structure cost 160k USD

Positioning Charts

USDBRL NDO Positioning Data 02/03/2021 - 09/03/2021

Positioning for USD has been scattered, there is little pattern to the options executed in that period. Near dated options have a low notional value except for one put, which is due to expire at the end of this month. What we have seen is that there is more upside cover executed with strikes above 6. These options have an expiry after April and are in a 6-6.20 range. However, we also see more put options executed between 5.40 and 5.80. The market is divided, but recent moves have been strong, we favour a weaker BRL, but the options market doesn't look convinced. 

USDBRL NDO Positioning Data 09/03/2021 - 16/03/2021

USDCNY Vanilla Positioning Data 02/03/2021 - 09/03/2021

Fewer options were executed this week than last, and those options that were executed were concentrated to a 6.30-6.70 range, but these options expire around April 14th. There is a cluster of options executed with an expiry of around June but is in a similar range to the options due to expire this month. The range is slightly narrower than last week, and this could mean the market consolidates in the near term. The emphasis remains on the downside. 

USDCNY Vanilla Positioning Data 09/03/2021 - 16/03/2021

USDZAR Vanilla Positioning Data 16/01/2020 - 16/02/2021

Options executed in the month up to 16th March saw the market move in line with spot. There was little downside cover through 14 in the previous month, so we saw more options executed below 14. However, these options do not expire soon and expire in May/June. There are more put options executed in March which suggests the market sees dollar strength in the near-term. There is little upside cover above 16 in the near term, but the majority of options executed are between 14-15. 

USDZAR Vanilla Positioning Data  16/02/2021 - 16/03/2021

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change


Key Events & Releases

Technical Charts 

JP Morgan Global FX Volatility Index

The index has improved in the last week after finding support at 7.76. The stochastics are falling yet converging on the upside, and the MACD diff is positive and converging, suggesting lower prices in the near term. Near term trend support and resistance has held firm, and to confirm the outlook of lower prices and the continuation of the pennant formation, the index needs to take 50 DMA once again. This would help confirm the bullish engulfing candle, with secondary support at 100 DMA. On the upside, a rejection of the pennant trend support could trigger gains back through trend support to 8.00. The index needs to take out the recent high at 8.08 in order to regain upside momentum. Neat term momentum favours the downside, but we could see prices fail below 50 DMA as apprehension in the market increases.

Dollar Index

The index was well bid at trend support, and this triggered a break above 91.50. The stochastics are falling out of overbought, and the MACD diff is positive and is starting to converge on the downside. If support at the 50 DMA continues to hold firm, this could trigger gains towards the 92.00 and then 92.20 – the recent highs. Conversely, rejection of prices at 50 DMA could trigger losses through the 91.70 before 91.50. A breach of this level would help confirm the double bottom around 91.30. The indicators point to lower prices, but prices need to break out of the 50 DMA support to confirm the outlook for bearish momentum.

USDZAR Currency

The pair broke below key support of 15.20 but has held above 14.80 in recent weeks. The indicators are positive, and the MACD diff is in positive territory and diverging, painting a mixed picture. The market has failed to break out of the narrow trading range, testing the key resistance at 15.00. The repeated reaffirmation of resistance and failure to confirm some bullish indicators suggest we could see the pair softens towards 14.80 in the near term. On the upside, the pair needs to take out the band of resistance at 100 and 50 DMA at 15.02 and 15.10, respectively, in order to improve upside conviction. The longer-term resistance level stands at 15.20. We anticipate prices to remain on-trend and soften in the near term after failing to gain a conviction on the upside.



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