FxWirePro: Touch ZAR with pinch of salt via put spreads on valuations and renewed geopolitical risks

The rand was unimpressed by the data and remained above to the USDZAR 14 mark in an EM-friendly environment. ZAR appears slightly overvalued. We now remain MW ZAR in the GBI-EM model portfolio, but risks are rising. The nominal GDP growth is underperforming substantially which together with more pressing issues at SOEs could drive the fiscal deficit to 5.3%-5.6% GDP this year. Global trade tensions have also re-emerged.

We have stayed MW on ZAR and even recommended a USDZAR put spread in April on hopes of global growth recovery but renewed local and external risks are likely to prove challenging. 

Finally, ZAR currently screens 3.7% overvalued in our BEER FV model. This is moderate compared to the 8% standard deviation of the model. In terms of the medium-term outlook, JPM’s projections currently point to the overvaluation extending to 5.6% by the end of 2019. This is driven by higher debt/GDP and lower real yield differentials.

While we activate a bullish USDZAR put spread for a potential China/global growth stabilization. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index was at 74 (bullish) while articulating at (15:18 GMT).

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