South Africa-Japan: Take profit on short ZAR-JPY (+1.5%) as EM sentiment stabilises, yen outlook mor

South Africa-Japan: Take profit on short ZAR-JPY (+1.5%) as EM sentiment stabilises, yen outlook more balanced

  • ZAR: EM FX sentiment stabilises, Turkey contagion limited, ANC compromise candidate emerging

  • JPY: Abe election gamble grows more contentious, more ambiguous for yen

South Africa ZAR had been hit - with other high-beta EM FX - by the recent upswing in the USD and UST yields. But as mentioned in our Week Ahead (link), USD/UST yield gains are likely to take a breather this week. In line with a tactical short-to-neutral view on the USD, we take this opportunity to reduce EM shorts. That Turkey TRY spillover was brief/shallow, suggests limited contagion into high-beta EM FX like the Rand. Finally, on the domestic front, the rise of an ANC 'compromise candidate' in Zweli Mkhize (current party Treasurer) is a positive development (FT, 10 Oct-17), which - if supported by moderate lawmakers from the two ANC factions - may even potentially bias us to go strategically long South Africa risk (on an RV basis) before the ANC Party Congress in December.

JPY had proved resilient through the recent USD strengthening - and this was largely due to Yuriko Koike's rise as a credible counterweight/alternative to the Abe status quo. However, the Tokyo Governor's decision not to run as Prime Minister has taken some steam from Party of Hope momentum (FT, 9 Oct-17) - making the near-term JPY trajectory less certain.

Finally, as we mentioned in our GBP-JPY note (link), it is less clear how markets would interpret an Abe 'win' with a smaller mandate:

  • JPY is tougher to call now as the baseline scenario of Abe/LDP victory must be weighed against the risk of reduced parliamentary mandate (current 86%) amid Koike criticism of Abenomics (this has not yet peaked). Will markets care more about the headline (Abe win, ref: Merkel in Germany), the "delta" (opposition gains seats, ref: AfD in Germany) or the "quality" of win (eg if Abe reverses call for VAT hike to fund spending or compromises on constitution reform)? This remains to be seen.

Visual: JPY vs ZAR (top chart; re-based where -1mth = 100, up = stronger) vs ZAR-JPY cross (lower chart)

#southafrica #japan #zar #jpy

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