Citi takes profits in South Africa currency trade

LONDON: Citigroup Inc said on Tuesday it was booking a profit in its three-month bet on the South African rand versus the US dollar.

The rand touched a new one-year high of 14.4300 in thin trade and was last 0.2% higher on the day, spurred by faith in South Africa's economy and global risk appetite as investors bet on a faster economic recovery from the COVID-19 pandemic.

Citi said it was taking profit on its three-month USD/ZAR put spread of 14.00 to 14.50, giving a total profit of 1.26% of the notional value. It purchased the put spread on Jan. 20.

"It has been an extraordinary performance in the ZAR, strongly supported by residual current account rebalancing forces, solid metal and mining terms of trade trends, and a sense of reflation and cyclically in global macro investment trends," Luis Costa, emerging markets strategist at Citi, wrote in a research note.

"But not everything is rosy. There is a point at which the underlying very weak growth trend and its fiscal implications could start impacting the ZAR in a negative way."

Hopes of faster economic momentum in South Africa in 2021 have been raised by recent data showing better-than-expected expansion in industrial production and an inching up in mining output.

Finance Minister Tito Mboweni is set to deliver the 2021 budget on Feb. 24, showing better-than-forecast revenue collection.

Citi said the potential for a lowering in issuance of South Africa government bonds had already been partially absorbed by the market.

South Africa looked set for "erratic growth trends" in 2021, due to weakness in the government's vaccination plans, Citi added.