Risks - Positioning, a hawkish SARB, exit speculations of President Zuma

The biggest risk is a benign period for risk sentiment, crowded one-sided positioning amid thin liquidity may sway USDZAR aggressively lower (that said, USDZAR traded in the upper part of the RSI territory 68% of trading days over the past year).

Consumer prices in South Africa rose 6.2% YoY in April of 2016, slowing from a 6.3% increase in the previous month. Figures came marginally lower than market expectations, as petrol cost fell while food prices went up at a faster pace. We think this CPI print may temporarily curb bond outflows.

On a monthly basis, consumer prices increased 0.8%, at the same pace as in March.

A hawkish SARB, ready to position ahead of the curve and surprise consensus by delivering a hike on Thursday may temporarily prop up the currency.

Lastly (and clearly a less relevant for near-term risks), the rumors regarding a managed exit of President Zuma (on Gupta scandal, Nkandla case) may embolden market participants to trade up the rand in the hope of an improved policy outlook.

We believe the dust may settle now but would maintain a bearish bias because headline inflation may increase in the near future on seasonality and the current account deficit remains a concern.

Ideally, we recommend a long USD/ZAR position at 15.65, with a target of 17.50 (+12%) and a stop loss at 14.96 (50dma, -4.4%). The time horizon of the trade is 1-2 months and the position entails negative carry of 63bp per month.

We advocate buying the diagonal spreads ahead of downside pressures and dubious eyes on continuation of long term uptrend. Hence, go long in USDZAR 2M OTM delta call while shorting 2W ATM call with positive thetas for time decay advantage on shorter tenors on short side.