Implied U.S. dollar/South African rand volatility fell to 13.1%/14.1% on Wednesday from 14.5%/15.5% on Monday. Traders bought at-the-money options at the beginning of the week, ahead of the Federal Reserve interest-rate cut on Wednesday. They anticipated a rate cut spurring short-term volatility in the pair, explained a trader in Johannesburg, and hence wanted to be long gamma. Gamma is the rate of change in the delta of an option relative to an incremental change in the price of the underlying. Trades were typically for one-week maturities, in average notionals of USD15-30 million.
The anticipated volatility never arrived. The U.S. dollar came off against the rand on Wednesday following the release of better-than-expected trade surplus data in South Africa, falling to ZAR7.80 on Wednesday from ZAR7.88 the previous Friday. This put the rand into a narrower trading range against the dollar and meant that the higher volatility was no longer justified. The 50 basis point cut from the Fed in the middle of last week had no appreciable impact on the dollar/rand options market.
Callum Henderson, emerging market currency strategist at Citibank in London, said the depreciation of the dollar against the rand was in line with a general dollar correction caused by concern over the state of the U.S. economy. Citibank's one-month forecast for dollar/rand is ZAR7.75.