Societe Generale: Go long South Africa’s rand, while shorting Russia’s ruble

World currencies

Go long South Africa’s rand, while shorting Russia’s ruble, Societe Generale said, pointing to diverging political narratives.

“South Africa continues reform story, while Russia geopolitics add to seasonal pressures on the ruble,” the bank said in a note last week.

It tipped the rand could continue to strengthen, pointing to continued reforms, including the potential for wide-ranging changes at state-owned enterprises. Societe Generale said it believed that would improve governance and credibility over the longer term.

It added that while the South African Reserve Bank (SARB) cut its repo rate down to 6.5 percent last month, but the hurdle for further easing is “extremely high.”

Improved credit outlook

At the same time, South Africa has a positive credit rating bias, the bank noted, pointing to Moody’s upgrading the credit outlook to stable last month. “South African government bonds may see stronger inflows over coming months,” it said, noting that the possibility that the bonds might be expelled from Citi’s World Government Bond Index has vanished.

But the bank added that Russia’s outlook stands in contrast. It said the ruble could be undermined by a tight foreign-exchange liquidity balance, with the current account surplus set to deteriorate despite high oil prices.

“Lower energy export volumes will likely be accompanied by higher demand for imported goods and services,” it said.

It’s the geopolitics

Geopolitical tensions are also set to weigh on the ruble, the bank said.

“The recent developments regarding the mass expulsion of Russian diplomats from over two dozen countries, alongside harsh exchanges of rhetoric, have elevated geopolitical uncertainties,” Societe Generale said. “Even if the longer-term impact on the Russian economy may be limited, assuming no implementation of harsh measures against Russian financial assets, adverse headline noise may render the ruble highly sensitive to negative moves in emerging market currencies. On the other hand, further deterioration in diplomatic relationships between Russia and Western counterparts may impair the ruble.”

Societe Generale advised a long ZAR/RUB, or rand-to-ruble, position. It said it targeted a 7.5 percent rise to 5.2056 on a three-to-six month trade horizon, and added it placed a stop loss at 4.6971.

On Monday during late afternoon Asian trade, the ZAR/RUB cross was at 4.8520.