FxWirePro: USD/ZAR seems unhedged amid long build ups in SAGB rates

The Rand is the easily the worst performing major currency in the month-to-date and week-to-date periods with the latest bout of weakness coming on increased political interference in the country’s central bank.

USDZAR is currently trading around 13.3786 levels. It made intraday high at 13.5356 and low at 13.3575 levels.

Worries around interference on institutions, announcements of populist measures may cause sporadic spells of weakness. However, the benign external environment will remain supportive.

Parameters: Long SAGB 2048 (FX unhedged) with a target at 8.99% and a stop at 10.39%.

Buying SAGB 8.75% 28-February-2048 bonds is recommended, which is currently trading at a yield of 9.99%. The position is FX-unhedged, with USDZAR at 13.89. We place a stop loss at a 10.39% yield level and a target of 8.99%. The trade generates carry of +22bp per month, inclusive of funding costs. Our trade horizon is 6-9 months.

Thesis: Fundamentals continue to remain supportive with lower inflation, shrinking current account deficit and retail sales. Slow policy normalization in DMs and improved EM fundamentals might continue to support high yielding EM assets.

Key levels & strategy: We recommend maintaining modest exposure at these levels as the newsflow around SARB independence clouds the sentiment. If the political situation improves, we can see yields falling further.

What to watch for: CPI (19 Jul), retail sales (19 Jul), SARB (20 Jul).