Broad bias: Haven't posted in a while, with a broad EM sell-off as we enter summer trading with flat FX vol curves and a dovish ECB taper. The BTP selloff mania provided many "third-derivative" trades in things like fading a full hike discount in Fed Funds OIS by year end for example. The large scale EM rally we saw from 2016-2018 to see the 50 peak in the EEM MSCI, makes me think that the current pullback may be deeper than a short-term one, with excess liquidity contracting at a faster pace, likely to cement the trough in global vol, and spread widening. Nordea covers this well over the past few months. As such, I think it would be best to be selectively long names in EM that have stronger idiosyncratic drivers, than be caught in attempting to catch a "fade of a short-term selloff to capture another broad EM leg higher": I see this as Chile being a story to be long on, and in contrast, to be med-high conviction to be short ZAR in near term.
South Africa: Continued ZAR selloff
Macro: The 2.2% contraction in QoQ GDP alongside a fall of business confidence to pre-Ramaphosa levels points to a poor growth outlook in the near-term. Inflation troughing at 4.0% is also likely to become a headwind with the inverse relationship to cyclical retail spending. A 6m lead in M2 to nominal CPI suggests that CPI is likely to move towards 5% by year end. The 6x9 ZAR FRA is currently pricing 25bps of a hike, and if we recall from May, that the SARB has removed cuts from the agenda. I think that this bias will continue to cause outflows out of SA.
Markets: The ATM FX vol curve is pretty flat all the way out into 1y, there isn't much vol premium to extract, and the FX forward curve (say, 12m-3m points curve) is still relatively flat vs other EM peers despite the increase in EM risk premium, which suggests to me the ZAR selloff can have more steam. 3m riskies look wide at 2y wides, and these levels in the riskie have prompted short-term pullbacks in a ZAR selloff, which I think is fair given the gravity of the move from 12.60 to current 13.40, but I don't see this as a concern to precipitate a large ZAR rally.
Trade: Buy 6m 2x3 USDZAR Call Spread (ATMF @ 13.74 vs 14.50, spot ref: 13.43 ) for 0.48%: I think that it would be more of a grind higher rather than a swift move higher in spot, and given the flatness of the vol curve, (ATM vols falling in the expiries but OTM call vols flat as we move further out the tenors), think a ratio call spread works. For comparison, the same ratio spread for 3m would cost 1.335%, so the trade static rolls decently.