FxWirePro: BRICS banks in action, CBR freezes to stabilize, SARB unlikely to intervene – Debit put spreads for RUB and ITM call for ZAR

CBR (Central Bank of Russia) has barred FX purchases on Russian Finance Ministry’s behalf since 9thAugust owing to the vulnerable ruble. 

In 2017, with an objective of the central bank’s mechanism to stabilize FX operations intuitively mopping up excess dollars from the system when the oil price was high – and collected these within CBR's FX reserves, the FX purchases were presented. If the crude oil price plunged to a low level, selling from these reserves would then help smooth the ruble's decline.

Such purchases could be scrapped despite the high oil price because the ruble has come under pressure because of US sanctions and it would not make sense for CBR to be buying more dollars at this time. If purchases are permanently scrapped, that would have a mild supportive effect on the ruble.

The South African central bank (SARB) can be relied upon. Vice governor Daniel Mminele commented on the current situation. The SARB would not intervene to support the rand as long as the market’s ability to function was not going to be compromised. 

The SARB was keeping a close eye on the situation but it did not have an exchange rate target. The last time the SARB intervened on the FX market was during the Asia crisis in 1997 – with little success. Over many years it has gained credibility on the market with its circumspect monetary policy so that the rand managed to avoid any serious crises as far as possible. 

The market is now pricing in a rate hike at year-end and the SARB will probably not hesitate to deliver in case of further rand weakness. That means concerns about contagion as a result of the lira crisis and resulting rand losses are not justified. Hence, the market has corrected the rand’s first shock reaction. 

Trading tips: 

At spot reference: 67.221 levels, 06-Sep-18 USDRUB 1x1 put spread (61.00/59.00) is advocated. 

At spot reference: 14.5737 levels, 06-Dec-18 USDZAR (2%) in the money call (14.50) is advocated. Both trades are meant on hedging grounds, a deep in the money call with very strong delta would most likely to move in tandem with the underlying moves.

Currency Strength Index: FxWirePro's hourly USD spot index has shown -123 (which is bearish), while articulating at 14:28 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex