This trade is based purely on fundamental analysis. The dismal exchange rate has been caused by dramatic capital flight, a drastic decrease in exported commodities such as palladium and gold, Eskom bailout, and the monetary policy of the South African Reserve bank. Substantial risks are the unpredictable decisions of the South African Reserve bank.
That being said, purchasing power parity will correct this anomaly to some extent, as it has with previous drops in the Rand's value. Furthermore, while South Africa's economy is perceived to more unstable, the fiscal policy of the United States has ensured that inflation will have a very substantial risk to dollar's value, due to the unprecedented amount of liquidity injections and repossessions undertaken by the Federal Reserve. Purchasing power parity will also help the Rand, in the sense that if the Euro increases in value (I argue it will outperform the dollar in 2020) there is greater financial interaction between South Africa, and other African countries who's currencies are pegged to the Euro.
Regarding commodities, after the pandemic subsides, palladium demand will rise, (South Africa is the world's largest producer) See the EZA(MSCI South Africa Index) and PL1! (NYMEX Palladium Futures) in the image below. Everyone and their mother knows gold is extremely bullish, and South Africa holds approximately 50% of the world's gold resources.
Push comes to shove, there are many factors pointing towards a recovery of the rand, and no such saving grace for the dollar. The outlined trade would yield approximately 200% return per margin required at 1:50 leverage, 7% margin rate.
P.S. There isn't even a category for fundamental analysis on tradingview! :S I am also not using a stop loss on this order, so keep that in mind regarding the "Short position" on the chart.
Here's a thought regarding this idea, (if you have the capital and the connections to execute)
Borrow 250k USD in ZAR, which is 4,760,552 at the current exchange rate of .053 ( 4.8% is the current commercial loan interest rate, virtually no likelihood of an increase in the next 6 months)
6 months from now, let's say the ZAR/USD exchange rate returns to .067 as it was in early February. Based on this exchange rate, the value would now be 318,956 USD. You swap your Rands for Dollars OTC (Better yet, use a forward to your advantage) You now have 318,956 USD that you didn't have before. As long as your return on investment using this capital is greater than your interest payments (aka investing in virtually any bond) this will be profitable.
Take it a step further, and invest this in a foreign asset with a return higher than the interest rate, where the return is in a currency with a high probability of outperforming the Rand (Not difficult to find a country with a better outlook) Bearing in mind, if you're correct, you could easily expect a return of 25% or more (8% paid twice a year in the case of a bond, and 10% gain on currency value increase) or 83K that year.
Don't even get me started on all the information that's not accounted for here, no, the numbers are not completely accurate, and it's overly simplistic to a very significant degree. Needless to say, if you have the capacity to execute a trade like this, you wouldn't need instructions!
myronemoyo
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Firstly, thank you for taking the time to actually explain your analysis.
Secondly, I am of a similar opinion. Rand is highly undervalued and is a matter of time until it recovers.
Thanks again.
Borrow 250k USD in ZAR, which is 4,760,552 at the current exchange rate of .053 ( 4.8% is the current commercial loan interest rate, virtually no likelihood of an increase in the next 6 months)
6 months from now, let's say the ZAR/USD exchange rate returns to .067 as it was in early February. Based on this exchange rate, the value would now be 318,956 USD. You swap your Rands for Dollars OTC (Better yet, use a forward to your advantage) You now have 318,956 USD that you didn't have before. As long as your return on investment using this capital is greater than your interest payments (aka investing in virtually any bond) this will be profitable.
Take it a step further, and invest this in a foreign asset with a return higher than the interest rate, where the return is in a currency with a high probability of outperforming the Rand (Not difficult to find a country with a better outlook) Bearing in mind, if you're correct, you could easily expect a return of 25% or more (8% paid twice a year in the case of a bond, and 10% gain on currency value increase) or 83K that year.
Don't even get me started on all the information that's not accounted for here, no, the numbers are not completely accurate, and it's overly simplistic to a very significant degree. Needless to say, if you have the capacity to execute a trade like this, you wouldn't need instructions!