FX

Note: Yesterday was a US public holiday (Labor Day).

Being the start of the month, yesterday saw a slew of August manufacturing PMI numbers published across the globe. The official reading from China came in at a slightly disappointing 51.1 (Bloomberg consensus: 51.2), and lower than July’s 51.7. The final reading of the HSBC/Markit manufacturing PMI, also released yesterday, came in at 50.2, down from 51.7 in July and slightly weaker than last week's flash reading of 50.3. The data for China clearly shows that economic activity has slowed down as we move further into the second half of the year. This is in line with Standard Bank’s view for slower GDP growth in H2:14. However, we do feel that targeted stimulus measures should prevent things from deteriorating markedly. Signals of slowing growth of economic activity in China is rand negative via its consequences for commodity demand and commodity prices, with which the local currency shares a cyclical relationship. China is, in general, the world’s biggest consumer of commodities, which make up around 60.0% to 70.0% of SA merchandise exports. Nearly all of SA’s merchandise exports to China are made up of commodities (more than 90.0%).

In Japan, the final August reading came in at a strong 52.2 (from 50.5 in July), although this was slightly lower than the preliminary 52.4 published a few weeks back. The final manufacturing PMI reading for the Eurozone came in slightly lower than the preliminary number at 50.7 (from 50.8). Economic activity in the Eurozone is being hampered by the economic consequences of conflict in the Ukraine - including sentiment effects and the impact of sanctions on Russia. Between what they say about economic performance in Japan and the Eurozone and thus what they mean for SA’s exports, versus what they mean for monetary policy decisions of the BoJ and ECB, the consequences of the data are ambiguous for the rand. The ECB and BoJ meet to decide on monetary policy on Thursday. The ECB could cut the key refi rate, our G10 FIC strategist Steve Barrow suggests, but this is only 15 bps, and any cut will thus have to be pretty small. It might pull something else out of the bag, such as more concrete details of its plans to buy ABS securities. In the end, Steve suspects that the ECB will deliver something to suggest policy has eased, but doesn’t think it will be full-scale government-bond-based QE just yet and, if that’s the case, the euro might be able to make a (temporary) comeback. The Reserve Bank of Australia left its monetary policy settings unchanged this morning – the Bank’s cash rate was kept at a record low of 2.5%.

The US ISM manufacturing survey will be published today (a day late due to yesterday’s holiday in the US). The headline figure for August is expected to pull back very slightly after a recent run of particularly strong readings. The 65-person Bloomberg poll gives a median of 57.0 after 57.1 in July. The July reading was the best since 2011. The skew on the survey lies to the downside, by some distance, with 31 of the 65 analysts predicting a soft number, and only 22 a number above 57.0. Steve Barrow, our G10 FIC Strategist, thinks that US surveys are still not being hit by things like the Ukraine crisis, which have weighed on European data. Hence he sees an upside risk to the ISM which, if correct, could aid the dollar but weigh on Treasuries. Any impact of this data on the local currency market will likely be felt largely via its perceived consequences for US monetary policy.

SA’s manufacturing PMI improved by 3.1pts to 49.0 in August, numbers released yesterday showed. SBGS economist Kim Silberman suggests that this indicates a possible return to more normal manufacturing output levels after months of production disruptions. PMI has remained below the 50 point mark since April 2014. PMI leads manufacturing by about 3 months, and thereby implies that, while growth may remain weak in Q3, it should normalise in Q4 . The business activity index increased significantly by 8pts from 39.4 in July to 47.4 in August. New sales orders recorded their highest level since February, rising from 45.4 in July to 49.8 in August. These improvements are likely supported by the slow return to full capacity in the PGM mining and metal sectors, Kim thinks. The PMI for expected business conditions , which has been consistently more optimistic than actual activity over the last five months, improved slightly from 55.4 in July to 56.3 August. Employment increased marginally from 43.9 July to 44.9 in August. The BER indicated that job growth in the sector is unlikely to improve in the short term; Kim thinks that there is potential for job losses in the sector. The inventories index rose from 47.3 in July to 50.7 in August, signalling that manufacturers have started to rebuild inventories. This is very encouraging. The purchasing commitments index also rose, from 38.6 in July to 46.6 index points in August indicating that demand might slowly be picking up. Prices rose to 77.3 index points in August from 76.5 in July. The PMI price measure generally leads PPI inflation by three months. The BER nevertheless still expects price pressures to ease in the period ahead, given that the rand exchange rate has been relatively stable and oil prices have fallen. This could help to counter increases in electricity tariffs and the recent three-year wage settlement of up to 10% per annum for the sector’s lowest paid workers. China PMI tends to lead SA PMI by about four months. PMI for emerging and developed economies remains just above 50 with the Chicago PMI recording a reading of 64.3 in August up from 52.6 in July.

Naamsa vehicle sales numbers for August were also released yesterday. They showed the y/y contraction in sales easing marginally to -1.4% from -1.5% in July. The outcome was weaker than the consensus prediction of -1.2%. While local new vehicle sales faced headwinds from subdued economic growth and pressure on consumers’ disposable income, Naamsa noted that new car sales had been supported by “another strong contribution from the car rental industry”. In the period ahead, new vehicle sales momentum would be hampered by relatively low economic growth, recent increases in interest rates and above inflation new vehicle price increases, Naamsa said. Volumes in the domestic market were expected to decline by between 4.0% and 5.0% compared with 2013. Export sales meanwhile shot up by 18.5% compared with August last year. Overall, continued strength in commercial vehicle sales was “encouraging”, and hinted at “improved investment sentiment”. The outlook for the SA automotive sector for the balance of 2014 would “remain challenging”, Naamsa said. A further improvement in export numbers was anticipated over the remainder of 2014, thanks to normalised industry vehicle production volumes. These results represent something of a mixed bag for the currency market. Weaker domestic new vehicle demand and a jump in vehicle exports is current account positive, while weakness in new vehicle sales is interest rate positive and thus rand negative.

The rand depreciated slightly against the US dollar yesterday, closing at USDZAR10.6747, compared with Friday’s close of USDZAR10.6666. The rand’s slight depreciation occurred into a mixed to stronger performance from the dollar against the major crosses, a mixed performance among commodity currencies and alongside mild weakness across the majority of EM currencies we monitor for purposes of this report. The dollar strengthened against the euro and the yen, while weakening slightly against the pound. The rand depreciated against the dollar, the euro and the pound, while strengthening against the yen. Three of the five commodity currencies we monitor – namely the NZD, the NOK and the CAD – appreciated on the day. The remaining two currencies – namely, the ZAR and the AUD – depreciated slightly on the day (see comment above regarding the RBA’s monetary policy decision this morning). All but two of the EM currencies we monitor depreciated. The exceptions were the TRY and the HUF, both of which appreciated. The rand was the second-worst performing commodity currency (beating only the AUD), and occupied slot number four among EM currencies (beaten by the TRY, the HUF and the INR). The rand traded between a low of USDZAR10.6448 and a high of USDZAR10.6852. Support from where the rand opened this morning sits at 10.6600, 10.6000, 10.5250 and 10.4600. Resistance levels sit at 10.6850, 10.7600, 10.7910 and 10.8350.

Turning to commodity prices, copper, Brent and gold fell by 0.6%, 0.4% and 0.1%. Platinum was meanwhile more or less unchanged. The ALSI rose by 0.5% and the EM MSCI rose by 0.3% on the day. The EMBI spread widened by 1 bp, while SA’s 5yr CDS spread compressed by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, edged down by 0.6%.

Non-residents were mild net buyers of local equities (ZAR163 million), but were aggressive net sellers of local bonds (-ZAR1 418 million). Selling of bonds was spread across the 1-3 (-ZAR1 701 million), 3-7 (-ZAR474 million) and 7-12 (-ZAR19 million) year buckets. Buying was meanwhile seen in the long-dated 12+ (ZAR776 million) year segment. Bond yields rose by between 0.5 of a bp (R208) and 3 bps (R203). The 12x15 FRA fell by 1 bp, while the 3x6 and the 6x9 FRAs were unchanged.

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