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The Armchair Trader was already working on its Short Trade of the Week before news broke regarding the rigging of the South African Rand by banks. Hence, there are really two stories here, but both qualify the ZAR for Short Trade of the Week. The first relates to the scandal, the second to the fundamentals, which will apply over the medium to long term.

The ZAR is widely available on financial spread betting and CFD trading platforms, usually paired with the USD. It is a free floating, widely traded currency. It sometimes enjoys correlation with the price of gold.

Seventeen banks have been accused by the South African regulator of rigging the country’s currency. Because currencies are traded in the interbank market and not on a public exchange, there is not the same level of transparency and oversight of currency markets. We have seen banks accused of rigging other prices in the past, including in the LIBOR and forex markets. Sources close to The Armchair Trader report that there are some commodities markets which are open to abuse. The question is whether the banks have really been rigging the ZAR, and whether the extent of that rigging has really affected the currency.

South Africa claims that the banks colluded in fixing the price of the ZAR using chat rooms to coordinate fictitious bids and offers in order to sway the market and will have to answer to the South African Competition Commission. Many emerging market currencies are vulnerable to such fixing, as the volumes are not as large as bigger currency pairs.

This needs to be taken into the context of the other reason why we see the ZAR as a medium term sell. South Africa, and its government, are under extreme pressure. President Jacob Zuma, South Africa’s president, has been accused of seeking to manipulate the levers of independent governance within South Africa, and indeed of corruption.

The sight of MPs being escorted by security out of the country’s parliament for protesting against Zuma is just the tip of the iceberg – Zuma also called on the army to defend parliament while he was making an address to the National Assembly. The African National Congress, which has been in power since the early 1990s, seems to be starting to lose its grip on the street. As we have seen elsewhere in Africa since the 1950s, political parties which secure independence (and the end of Apartheid has to be seen as a radical new direction for South Africa) sometimes have difficulty actually giving up power.

The ANC is now being challenged by an increasingly influential opposition which is eroding its core support base. Middle class South Africans are becoming more disenchanted with the ANC by the week. It is harder to define South Africa by race, as a rainbow coalition seems to be assembling against what is increasingly seen as an ANC ‘old guard’ led by Zuma.

But what does this mean for the ZAR? Zuma is one of those politicians who does not seem to grasp the influence of global markets and foreign opinion over his country. The street fighter mentality that brought him to power does not accept the idea that the country needs cleaner, more transparent government to encourage foreign investment.

Is this reality? One major African private equity investor recently told The Armchair Trader that he was not allocating money to South Africa due to ‘political uncertainty’, yet has millions invested in Ghana, Kenya and Zambia. Yet South Africa is meant to be one of the largest and most sophisticated markets in Africa, and certainly accounts for the lion’s share of the listed equities market cap.

At the time of writing USD/ZAR was at 12.9573 and has been strengthening this week. Much of this is down to receding panic about the new Trump administration, as the market takes stock of the fact that the White House has not burned down yet. Looking at the 52 week range, it has been as weak as 16.3129. Our thesis is that the political climate within South Africa is just too unstable. As the Zuma government weakens, it will start lashing out in an effort to keep hold of the strings of power, further undermining investor confidence. It looks as if much of the price action in the last 3-4 months has been driven more by the GBP and USD’s antics than those of the ZAR.

We don’t think this is an immediate short, particularly if you are trading the ZAR against USD – the White House is, if anything, currently more unpredictable. It may be worth looking at the CHF/ZAR pair instead.

There is a significant trend in favour of the ZAR at the moment, but traders should keep an eye on the economics here too – South Africa’s economic growth in 2016 was at its slowest rate since it endured a recession in 2009. The country has faced a drought, a slowdown in international trade and depressed commodity prices. Its finance minister has been under police investigation, which carved 3% off the ZAR when it was announced last year.

Analysts are calling it a tug of war between relatively sound fundamentals, versus the political risk issues. We believe the latter will outweigh the former. You have 38% unemployment in the 15-34 age group which is never a good scenario for any country or government. On top of that these is a very good chance that South Africa’s foreign debt will be downgraded this year to junk status, which will be a body slam to the ZAR. Analysts are very open about the fact that the political turbulence is driving progressive downgrades.

Traders can expect the ZAR to take a beating in 2017: it currently looks like the currency is progressively strengthening against GBP and USD, but it is political issues in the UK and US which are flattering the ZAR. This year could be the year when we find out whether South Africa’s emperor is wearing any clothes.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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