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FX Options Weekly

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Macro and Vol Commentary

As the country that first reported a number of omicron cases, the South African economy is under significant pressure to limit the number of cases. The country has already implemented a range of restrictions, ranging from travel bans to vaccine mandates for those wanting to access public services and businesses. However, it is yet to implement strict lockdown measures. The news surrounding the lethality of the variant have calmed the markets and supported the rand, but where will the USDZAR pair head on from here?

Virus Situation

  • More than 90 nations have already introduced travel bans before the nation's summer holiday season
  • According to PWC, these bans could cost the country $406m in potential foreign revenue
  • At the same time, President Ramaphosa is reluctant to reintroduce lockdown measures after suffering industries have called for a more targeted approach
  • Last year the government imposed five levels of restrictions, now it is on Level 1
  • Infected people, however, seem to have mild symptoms, and so far, this has led to fewer hospitalisations since the outbreak
    • Information is still coming out, but this has helped rebound market sentiment
  • In the meantime, the number of vaccinations is rising but remains low, 25% of the adult population, and leave the economy vulnerable to further potential virus spread.

Economic Overview

  • In Q3, the economy contracted by 1.5% q/q, with July riots and port stoppages highlighted as one of the biggest downsides to growth in the quarter
    • According to the SAPOA, the riots saw businesses shuttered and cost the country about $3.1b in lost output
  • Manufacturing and agriculture contracted significantly
  • Manufacturing sentiment PMI suffered, and the steel and engineering sector strikes in October further drove the decline
    • In November, however, was saw a rebound in performance, jumping to a 5-month high of 57.2; this is mostly an improvement from poor performance seen in October
  • The jobless rate continued to climb, jumping up to 34.9% in Q3, the series record
    • This could put significant pressure on authorities to extend relief measures
    • This, however, would go against the government's commitment to tame fiscal instability and growing debt
    • Strict labour laws and shortage of talent continue to deter economic recovery
  • For 2021, the optimistic 5% forecast for 2021 growth is unlikely to be achieved
    • The fading base effects are also projected to weigh on the data in the last quarter of the year
  • Despite the rising number of COVID-19 cases, the central bank continues to hike interest rates as means of controlling the country's inflation rate
    • The economy hiked its interest rate for the first time in three years in November, up by 25bps to 3.75%.
  • Consumer inflation grew at 5.0% in October, in line with the bank's target
  • Core inflation yielded 3.2% y/y and is forecast to remain benign through 2023, given muted domestic demand outlook
  • Retail sales contracted in October, down by 1.3% m/m, after growing by 5.1% in the previous month.
  • Mining production, however, continued to grow, up by 3.4% y/y in the same period after a sharp contraction in September
    • Electricity prices are likely to rise even further in 2022 after Eskom applied for a 20.5% electricity tariff increase.
    • While it is rare the full amount is granted by the regulator, the size of the increase suggests we could see accelerated bill payments for manufacturers next year.

An industry strike in October, the continuation of electricity outages, and the emergence of the new, more transmissible variant are set to stall economic growth in the last quarter of the year. Job losses continue to mount, further aggravating the issue, and we do not envisage additional fiscal support coming from the government, instead, it might attempt to implement a targeted lockdown approach to ensure businesses and manufacturing could continue to operate without restrictions. Near term growth remains fragile given the rising number of COVID-19 cases alongside rising energy prices and power outages in the economy. Overall, the growth constraints are not necessarily monetary but rather structural such as labour market and electricity supply.

Volatility Commentary

Mounting concerns over the impact of Omicron have prompted 1-month USDZAR volatility to realise above the implied, as the virus variant was first detected in South Africa. On the other hand, with the latest US November CPI release at 6.8% YoY keeping inflation figures stubbornly high, the market is pricing in three FED rate hikes. This would likely boost USD strength and weigh down on ZAR. All in all, we favour buying USDZAR in order to gain from potential USD strength over rand in the near term.

USDZAR 1-month Realised and Implied Volatility

USDZAR Trade Idea 

  • For 1-month expiry
  • Buy USDZAR Call in USD 10mio, Strike 16.5
  • Sell USDZAR No-Touch in USD 250K, Barrier 14
  • Total structure premium receive circa USD 154K

Positioning Charts

USDBRL NDO Positioning Data 26/11/2021 - 03/12/2021

In the week ending December 10th, we saw more options were executed, but the notional size for future expiries has reduced, and we saw more calls in the lower prices ranges. There is a cluster of put and call options around 5.40-5.80 and it widens out and gets smaller in notional further in the future, and there is little conviction in the market.

USDBRL NDO Positioning Data 03/12/2021 - 10/12/2021

USDCNY Vanilla Positioning Data 26/11/2021 - 03/12/2021

The options market saw more volume in the week to December 10, but both puts and calls growing in notional size and volume. The range of puts was relatively wide between 6.10-6.90 and we see bigger notionals in 2022. There are 2 large calls and 2 puts that are due to expire in April with a strike range positioned between 6.30 and 6.60. The positioning in the near term points to an increase in call week-on-week, so we can assume the market begins to favour the upside.

USDCNY Vanilla Positioning Data 03/12/2021 - 10/12/2021

USDZAR Vanilla Positioning Data 10/10/2021 - 10/11/2021

Trading volumes have remained unchanged week-on-week, but the size of the notionals diminished, suggesting less conviction in the market about the price outlook The composition of calls vs puts has remained the same but we saw a shift in all positions from 13-17 to 14-18, suggesting the trend begins to favour the upside. As we move through November the market shows slightly fewer calls traded with strong notional values. The range in the near term is slightly narrower but as we move away from the spot, the range is wider. We anticipate the market will remain on-trend in the near term.

USDZAR Vanilla Positioning Data 10/11/2021 - 10/12/2021

Charts and Tables

FX Expiries

Volatility Grid

Historical Spot FX Volatility (30D Rolling)

FX Matrix (today)

Weekly Change

Key Events & Releases

Technical Analysis

JP Morgan Global FX Volatility 

The index weakened yesterday, falling below the 8.00 support level to close at 7.81. The prices have found support at 38.2% fib level at 7.79. The stochastics are seen falling, with %K/%D in the oversold and converging. The MACD diff is negative and converging on the upside, supporting the outlook for a change to bullish momentum. On the upside, the break above 10 MA at 7.85 could set the prices to test the 40 MA at the 8.00 level. Conversely, to confirm the outlook for lower prices, the index needs to take out the 38.2% fib support, which would signal a strong bearish momentum. At the same time, 40 MA broke below 100 MA today, a death cross pattern, which is a strong sell signal. We expect to see additional market softness in the near term before a trend reversal.

Dollar Index 

The index has improved in the recent weeks but has struggled to break above resistance at 96.9 and softened yesterday into 96.20. The stochastics are falling, with %K/%D diverging out of the overbought, which means we could see a change of trend in the near term. Likewise, the MACD diff flipped into the negative territory, a strong sell signal in the near term. The index needs to hold above the trend support 96.16 before it could target the 10 MA at 96.4 and 97.00. On the downside, the break below the 23.6% fib level at 96.07 could pave the way for 96.00. All three moving averages have been broken below, and indicators point to further softness in the index in the near term.


The paid was well bid and this triggered gains through all moving averages last week, abut resistance at 16.20 held firm, and the pair softened into 15.98. The stochastics have converged on the downside and are now falling, and the MACD diff is negative and diverging, suggesting growing selling pressures. The reaffirmation of resistance at 10 MA at 16.06 could trigger a break below the 40, and 100 MAs at 15.9 would help to confirm the bearish engulfing formation today. Conversely, a breach of resistance at 16.20 may prompt the bulls to target the 16.36, the highs last seen at the beginning of November. The most recent gains have been strong, but yesterday’s strong candle and indicators point to further bearish momentum.




This is a marketing communication. The information in this report is provided solely for informational purposes and should not be regarded as a recommendation to buy, sell or otherwise deal in any particular investment. Please be aware that, where any views have been expressed in this report, the author of this report may have had many, varied views over the past 12 months, including contrary views.

A large number of views are being generated at all times and these may change quickly. Any valuations or underlying assumptions made are solely based upon the author’s market knowledge and experience.

Please contact the author should you require a copy of any previous reports for comparative purposes. Furthermore, the information in this report has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Data in this report has been sourced from Bloomberg unless otherwise stated. All information in this report is obtained from sources believed to be reliable and we make no representation as to its completeness or accuracy.

This report is not subject to any prohibition on dealing ahead of the dissemination of investment research. Accordingly, the information may have been acted upon by us for our own purposes and has not been procured for the exclusive benefit of customers. Sucden Financial believes that the information contained within this report is already in the public domain. Private customers should not invest in these products unless they are satisfied that the products are suitable for them and they have sought professional advice. Please read our full risk warnings and disclaimers.

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