Can it be a revival for South Africa after brand new cabinet or political risk premium still lingers around ZAR?

The South African budget data for January that was published yesterday once again confirmed the urgent need to consolidate public finances. The seasonally adjusted data illustrated a budget gap of approx. ZAR 41bn., thus recording a mom rise. After the new finance minister Nhlanhla Nene was sworn in on Tuesday he had pointed out that the government was already in talks with the rating agencies. But it remains to be seen whether they will accept the consolidation efforts presented in last week’s budget or whether they demand additional changes.

The outlook for the current account deficit that had fallen as a result of improved trade balance data over the course of 2017 also deteriorated recently. The strong rand made imports cheaper while exports became more expensive. The volatile data recorded a significantly higher deficit of just under ZAR 28bn. for January. Following the publication of the data, USDZAR appreciated slightly and traded at levels around 11.80 in the end.

While rates positioning already shows as high, we still see some positioning scope on lower FX hedging behavior. Overall we would guess we are 70-80% with the positioning build up. The recent client survey shows that investors extended their overweight rates positions for a third consecutive month in February. Long SAGB positions are now largest overweight in EMEA EM, recently replacing long OFZ positions (refer 2nd chart).

However, compared to Brazil, which also underwent a period of political change, there is perhaps some further room to extend overweight rates positions. Importantly, FX positioning lags substantially vs. Russia or Brazil (refer 1st chart). This is indicative of traditionally higher FX hedge ratios on real money holdings in South Africa compared to other markets. However, this could now also change to some extent:

We believe there is a case for sustainably lower FX volatility as the political risk premium embedded in ZAR since 2015 fades (1st chart). Courtesy: JPM

Currency Strength Index: FxWirePro’s hourly USD spot index has shown 48 (which is bullish ahead of US unemployment claims and Fed chief Powell’s testimony) while articulating (at 12:35 GMT), for more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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