Analysts at TD Securities noted that “the long USDZAR position we opened in our model portfolio on 1 November has been stopped at 14.90 at market reopening”.
Key Quotes:
“Accordingly, we close it at a 1.5% loss on a notional amount of $1m. The positive market reaction (ZAR approx. 1.1% stronger as trading resumed on Monday in Asia time) has been triggered by Moody’s change in outlook to negative from stable, signaling the risk that South Africa’s ratings may be downgraded to junk over the coming 12-18 months.
While this outcome (the change in outlook is the least bad of the possible negative outcomes) was our base case scenario, we thought the market reaction would be more adverse.
The market, however, has rewarded the fact that Moody’s has bought South Africa additional time to rectify the trajectory of fiscal deficits and the debt-to-GDP ratio over the coming months.
We think this is unlikely to happen, and therefore believe that the negative rand response will be lagged despite the positive market response.
We look for opportunities to reenter short ZAR positions at better levels.”
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