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RUB should be protected by its significant current account surplus (3.5% GDP in 2016), political stability and reduced risk of imminent FX intervention to rebuild FX reserves.
So stay short in ZAR/RUB, looking for move to 3.5 over 12-18 months The 7.6%v annualized cost of long USD/ZAR is an impediment to long-term trades even allowing for a 5.1% inflation differential.
When crude oil prices hold up firmly relative to non-oil commodities (notably industrial metals that are most at risk from sentiment regarding the Chinese economy deteriorating again) this trade should also benefit.
Going short USD/RUB by contrast, earns 9.8% positive carry, well above the 6.2% Russian/US inflation differential.
Short ZAR/RUB is positive carry and allows more leeway on timing as a result.
Risks Resistance to further RUB gains in a ‘risk-on’ market In the short-term, the entry point is a risk given the ZAR’s fall over the last week.
Any return to political calm in South Africa could trigger short-covering. In the longer-run, this trade should perform best in a broad risk sell-off, unless that sees oil prices fall very sharply. So the risk is that ZAR and RUB both appreciate and the SARB is less resistant to appreciation.
Between January 18 and the start of May, the RUB gained 23% against the dollar, the ZAR 18% and the BRL 13%. The rand has already weakened sharply this month (by 9%) but subject to short-covering, remains very vulnerable both to domestic political concerns and to any renewed risk aversion stemming from either talk of Fed policy tightening or fears of weaker growth in China and renewed commodity weakness.
