South Africa\u2019s trade balance moved into deficit in May, recorded at -R1.79bn. That compares with a surplus of R15.16bn in the previous month, marking a sharp deterioration in the monthly external trade position.<\/p>\n
The shift implies that the value of imports exceeded exports during May, reversing April\u2019s surplus. The figures are reported in rands and reflect the net balance of goods trade for the month.<\/p>\n
The unexpected swing to a trade deficit is a significant bearish signal for the South African Rand. This indicates that more money is flowing out of the country to pay for imports than is coming in from exports. We should anticipate downward pressure on the ZAR in the near term.<\/p>\n
Given this outlook, we are positioning for a weaker rand by looking at USD\/ZAR call options. The currency pair has already climbed towards 18.90 in recent weeks, and this data provides a fundamental reason for it to test the 19.00 psychological level. This move is supported by a broad-based strengthening of the US dollar globally.<\/p>\n
The poor trade figures are likely linked to falling commodity prices, which form a large part of South Africa\u2019s export revenue. For example, the basket price for platinum group metals has fallen by over 4% in June alone. As long as these key export prices remain soft, the trade balance is unlikely to recover quickly.<\/p>\n
This kind of surprise economic data also increases market nervousness, which means volatility is likely to rise. The South African Volatility Index (SAVI) has already ticked up to a three-month high of 22. We see an opportunity in buying options to profit from larger price swings in either direction, such as through straddles on major rand-sensitive equities.<\/p>\n
For equities, we expect a split performance based on currency exposure. Companies that rely on imports, such as retailers, will face margin pressure from a weaker rand and higher costs. We would look to use put options on these names, while favoring rand-hedge stocks like major mining companies that earn their revenue in dollars.<\/p>\n
Looking back, periods of sharp trade balance deterioration, like in the commodity slump of 2015, have preceded extended periods of rand weakness. With the latest inflation data coming in slightly above expectations at 5.4%, the South African Reserve Bank is now in a tougher spot ahead of its next meeting. This adds another layer of risk that we must monitor closely.<\/p>\n\n\n\n