A run of weaker US key economic data (ISM, home sales, non-farm payrolls) has moderated Fed policy expectations somewhat, and provided some support for EM FX of late, with average gains of around 2% vs the USD month to date. Whether this will be sustained going forward we are unsure, probably unlikely until we see EM real short-term rates being pushed further towards the historical averages. Regardless, some of the moves over the past 1-2 weeks have resulted in some noticeable shifts in positioning judging by dbSelect, with latest figures at the time of writing a week old, but showing a divergence between TRY and ZAR positions that we have rarely seen (see latest dbSelect). Indeed, the unwind of the short TRY position built up going into year-end/the new year has been dramatic, with TRY going from being one of the biggest net shorts in early December to the 3rd biggest long after INR and MXN currently. At the same time the ZAR short has grown to a new 12 month low, despite SARB responding in an arguably more timely manner than the CBT and despite signs of improvement in some short-term economic stats (retail sales, manufacturing production).
With positioning cleaner, and with the potential for continued political unrest going into and over the end-of-March regional elections, as well as with significant uncertainty still with regards to the CBT’s commitment to rein in inflation, this might be a good opportunity therefore to position for TRY underperformance vs ZAR where the sell-off over the past few months has been driven more by global uncertainty/beta than country specific factors. We therefore see value in USD/ZAR lower, USD/TRY higher dual digitals. Our options desk suggest a 6m dual digital 4% OTM USD/TRY call / ATMS USD/ZAR put for an indicative 13.5% of notional. Call for firm prices.
Read the full report: FX Daily
DB