FxWirePro: Political and monetary buzz in BRICS FX - episode 2

CNY: In China, a former PBOC economist said the government should scrap the annual GDP target and focus more on employment. The reasoning is that a narrow focus on growth will only reinforce the inefficiencies and imbalances in the economy, including overinvestment, excessive credit growth, and a further build-up in debt.

China is unlikely to abandon its GDP target altogether near term. However, it is expected to pay greater attention to financial risks in 2018. For USDCNY, it is projected to reach 6.65 by Q2’2018. Currently, it is closed just a touch higher yesterday around 6.6164.

We advocate buying USDCNH 1m call strike 6.63. Entry level, spot ref: 6.6025, maximum loss limited to the premium paid.

USDCNH and implied vol is marginally below our entry level; use as a hedge against North Korea risks, EUR correction, and for portfolios that are short dollars and long carry such as our own.

Risks & what to watch for:

USD dynamics and leadership changes: Capital outflows are minimal, so CNH might need to adjust alongside a broader dollar move.

ZAR: The market had been speculating on it for days, and now Cyril Ramaphosa has been elected by the ANC (African National Congress) to become its new leader and Presidential candidate for the elections in 2019. He was able to assert himself over Nkosazana Dlamini-Zuma, an ally of the controversial President Jacob Zuma. While Dlamini-Zuma represents the “continue as before” Ramaphosa is the candidate favored by the financial markets as he is seen to be able to get to grips with South Africa’s major problems: corruption, weak growth, ailing state finances. Hardly surprising therefore that ZAR was able to appreciate notably over the past days. While the euphoria on the markets is understandable it is exaggerated in our view. The ANC remains deeply split. In addition to the party leader, other important posts were assigned and some Zuma supporters were successful here.

Moreover, Zuma is likely to remain President until the elections in 2019. That means the infighting within the ANC is not over yet. Even if ZAR is likely to remain supported by this wave of euphoria for a little longer disillusionment is likely to take hold soon in view of the many difficulties. We, therefore, expect ZAR to ease again over the coming weeks.

The bulk of good news now priced in, local ZAR assets have been on fire in the lead-up to this announcement, as markets increasingly priced in the probability of a Ramaphosa win. (USDZAR plunged from 14.17 post-Standard & Poor’s November 24th downgrade to 12.53 intraday yesterday, while yields on the benchmark 10-yr South African government bond R186s plummeted from 9.43% to 8.93% over the same period.) The boost of confidence for business and consumers from Ramaphosa’s ascension will be significant.