Bank of America predicts USD/ZAR to rise during MSCI rebalancing

Bank of America forecasts the South African rand to weaken against the U.S. dollar on August 26 between 3-4 PM London time, labeling it their "highest conviction" trade related to the upcoming MSCI index rebalancing. The bank also anticipates the Czech koruna will weaken, while the Israeli shekel is expected to receive the largest inflows and the South Korean won the second-largest outflows. BofA notes that certain Asian currencies, including the Korean won and Taiwan dollar, appear less sensitive to MSCI Emerging Markets flows compared to currencies from EMEA and Latin America.

Analysis

Bank of America has identified specific, short-term trading opportunities in emerging market currencies tied to the upcoming MSCI index rebalancing on August 26. The bank's "highest conviction" trade is a weakening of the South African rand against the U.S. dollar (USD/ZAR) within a defined window of 3:00 PM to 4:00 PM London time. A similar weakening is forecast for the Czech koruna (USD/CZK) between 3:45 PM and 4:00 PM, attributed to the currency's "considerable sensitivity to MSCI flows." In terms of fund movements, the Israeli shekel is anticipated to receive the largest inflows, though BofA tempers this by noting that historical "hit ratios" for predicting shekel movements are low, introducing a significant element of uncertainty. Conversely, the South Korean won is expected to see the second-largest outflows. The analysis also provides broader context, indicating that Asian currencies like the Korean won and Taiwan dollar show less sensitivity to these rebalancing flows compared to currencies in the EMEA and Latin American regions, a key consideration for assessing the potential magnitude of these market moves.

Key Decisions for Investors

• Investors with tactical FX mandates should consider short positions in the South African rand and Czech koruna against the USD, timed precisely on August 26 to coincide with the specific windows identified by Bank of America.
• Caution is warranted when positioning for a stronger Israeli shekel; despite expectations of the largest inflows, the bank's own data highlights a low historical success rate for predicting its movement.
• While the South Korean won faces significant outflows, its noted lower sensitivity to MSCI rebalancing might dampen the price impact, suggesting a short position may carry less conviction than in more sensitive EMEA currencies.
• Portfolio managers should review their emerging market currency exposures ahead of the rebalancing to anticipate potential volatility and manage risk, especially in ZAR and CZK holdings.