According to reports, Finance Minister Gordhan would receive a ‘warning statement’ which indicates that he is about to be charged with an offence. This is most likely a politically motivated charge and consequently, we think political instability can increase substantially in South Africa. That’s bad news for ZAR and indeed for most ZAR denominated assets.

Stay Short in USDZAR: Current spot ref. at 14.0710, contemplating above political turbulence we recommend USDZAR shorts but with positional trades using diagonal credit put spreads (DCPS), targeting 8.5% move lower to 12.8749 in medium terms. We place a stop-loss 1% higher than current levels at 14.1741 9 (as shown in the diagram, one can also keep the tolerance levels of 1-2% extra).

Our trade horizon is 2 months. The position generates positive carry of about +60bp / month. Please be noted that the tenors shown in the diagram are just for demonstration purpose only, use narrowed tenors on the short side (preferably 2w or so would give you ideal entry point in the strategy). These diagonal option positions are likely to arrest both short-term upswings and long term downswings.

Risk Profiling: China, commodity prices, and FOMC constitute major risks Prominent risks to this recommendation include the resurgence of negative headlines from China, a collapse in hard commodity prices, and episodic fears regarding imminent FOMC rate hikes, or hikes occurring at a faster pace than anticipated.

Additionally, there may be domestic risks stemming from political infighting, labor unrest, and ratings downgrades. Bouts of profit-taking and consolidation may also undermine the position, while a lack of liquidity may additionally be a consideration for the trade, exacerbating moves in either direction.