FxWirePro: Uphold delta puts to hedge USD/ZAR on prolonged political risks

The South African production in the manufacturing sector in February disappointed at -2.4% mom for the second time running. After production had already eased by 1.6% mom in January it had been expected that the figure was going to show a rise (Bloomberg consensus: +0.9%).

Compared with the same month last year this only leaves a rise of 0.6% (consensus expectation had been +2.7%). That means the growth contribution in Q1 is likely to be lower than in the final quarter 2017.

After all the sector contributes 13% to GDP. The data did not weaken the rand initially as, in line with other EM currencies, it had already come under pressure over the past few days as a result of increasing concerns about a trade war and risk-off sentiment.

USDZAR recently traded at levels just above 12.00. On Monday the pair briefly reached 12.15, in addition to disappointing data on company sentiment in the eurozone this was also due to a comment by Finance Minister Nhlanhla Nene. He had warned that some cities in South Africa were close to financial collapse and had demanded countermeasures.

The news had hardly any effect on the rand, like other EM currencies it benefitted from continued USD weakness. We remain skeptical and urge investors to be cautious not least due to the continued political risks.

On hedging grounds, we would like to maintain shorts in USDZAR (post-February 2018 budget announcement) by buying 3m ATM -0.49 delta put options with a view to arresting downside risks.

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