Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
88 Blog Posts


The South African Rand (ZAR) did not have a good 2015 (down 25% versus the USD), but the 2016 kick-off has been especially unkind. There was an fx flash crash in early Monday trade in excess of 9% to just under 18.00 per USD  in the cross before ZAR recovered to mid 16’s to be only down 2.3% on the day. A move of this magnitude is very rare (last seen in 2008 on this currency cross). South Africa has a population of 52mm and has the 2nd largest economy in Africa (US$350bln GDP), behind Nigeria. South Africa is China’s largest trading partner in Africa and export to China make up 37% of South Africa’s exports. Beijing is 11,700km (7k miles) from Johannesburg yet you can fly direct 3 times per week. Hundreds of Chinese companies, both state-owned and private operate across South Africa.

Mrs. Watanabe (Japan retail) has been given the blame for the poor ZAR positioning where stops were hit and margin calls ensued. We will see when the tide goes out who is naked, but if retail is behind it, big lumps. Tokyo Financial Exchange reported that margin trade positions in ZAR had doubled over the last 6 months to over 260k contracts. I can confirm Japan retail involvement in the cross, but the scale seem too large to not involve professionals (CTA/macro funds). Jan. 11th was also a Japanese holiday today, “Coming of Age Day”, making the 7am Tokyo time downdraft even more peculiar.

Unconventional monetary policy (QE) has resulted in medicated markets across the globe, but fx is the one area where market views can still reverberate as the transfer mechanism is more direct. FX turnover is >$5tln per day, it is a 24-hour market and >90% of turnover is speculative in nature (approx. 7% trade related). Central banks are the classic non-profit maximizing market participant. As we have seen with the PBoC and China’s attempt to slow the pace of depreciation in the RMB, fx intervention can only go so far. The South African Reserve Bank (SARB) have fx reserves of approx. $50bln (less than 1/2 of China’s,GDP adjusted). The other tools at SARBs avail are being employed to stem the downdraft where we saw a 25bp rate hike to 6.25% in Nov. 15′ with a more meaty 50bp expected before the end of Jan. 2016. Other factors are at play as well in the case of South Africa. The President, Zuma fired his Finance Minister, Nene in December which sent the ZAR reeling 5% when unknown van Rooyen was briefly appointed (the post now manned by Gordhan who held the post 09′-14′).

The markets that really matter of course in this high stakes game are the US and China. The tectonic plates are large and moving in opposite directions with the Fed expected to hike another 25bp by the end of Q2 16′ and the PBoC expected to cut the RRR (Reserve Requirement Ratio) up to 3 times by 50bp on each occasion over the same time frame. There will be tsunami waves. Trade accordingly. JCG

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One comment

  1. firehorsecaper

    I saw my China Syndrome tag copied already (Blackrock). It os the phenomenon of an unconstrained nuclear meltdown where the “situation” could not be contained, hence it melted all the way through the Earth eventually reaching China. In my use it is more of a reverse China Syndrome with the meltdown seeping to other parts of the globe.

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