FX

The rand depreciated against the US dollar yesterday for the third consecutive day, closing at USDZAR10.93, compared with Tuesday’s close of USDZAR10.92, still feeling the pain of further deterioration of SA’s current account position. Intraday, the rand broke through the USDZAR11.00 mark temporarily for the first time since 21 February 2014. The rand’s depreciation against the greenback occurred into a mixed performance from the dollar against the major crosses, and weakness across most of the commodity and EM currencies we monitor for purposes of this report. The dollar strengthened against the euro and the yen, while weakening against the pound. The rand depreciated against the dollar and the pound, while strengthening against the euro and the yen. Three of the five commodity currencies we monitor for the purposes of this report – namely the ZAR, the NZD and the AUD – depreciated on the day. The exceptions were the CAD and the NOK. Most of the EM currencies we monitor for the purposes of this report depreciated on the day. The exceptions were the HUF, the TRY and the MXN. The rand took up the middle position in the commodity currencies category and occupied the middle to higher position in the EM currencies category. The rand traded between a low of USDZAR10.9069 and a high of USDZAR11.0162. Support from where the rand opened this morning sits at 10.7600, 10.6850 and 10.6300. Resistance levels sit at 10.9650, 11.0500 and 11.1200.

Turning to commodity prices, Brent, gold and platinum fell by 1.1%, 0.5% and 0.4%, respectively. Copper meanwhile rose by 0.4%. The ALSI fell by 0.9% and the EM MSCI dipped by 1.1 %. The EMBI spread compressed by 1 bp and SA’s 5yr CDS spread widened by 0.5 of a bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 4.6%.

Non-residents were meaningful net buyers of local equities (ZAR707 million) but were aggressive net sellers of local bonds (-ZAR2 132 million). Selling of bonds was seen in the 12+ (-ZAR1 404 million), 7-12 (-ZAR387 million), 3-7 (-ZAR187 million) and 1-3 (-ZAR154 million) year buckets. Bond yields were mixed on the day. The R203 rose by 1 bp, the R208 rose by 0.5 of a bp, the R186 fell by 1 bp and the R214 fell by 4 bps. The 3x6 and the 6x9 FRAs both rose by 6 bps, and 12x15 FRA rose by 5 bps.

With respect to local data releases, mining and manufacturing numbers for July will be published by Statistics SA today. Consensus forecasts show the y/y contraction in mining output deepening to -6.7% from -5.7% in June, notwithstanding an expected swing in m/m (sa) growth to 1.9% from -1.4%. It perhaps reflects the view that the normalisation of PGM production, following the end to strike action in June, will be slow. Base effects will act downwards on the result; in July last year, mining output grew by 3.7% on a seasonally adjusted basis. Y/Y growth of manufacturing output is seen swinging negative to -5.8% in July from 0.5% in June; m/m it is seen contracting by -1.9%, following an increase of 1.4% in June. This with little doubt reflects anticipated impacts of NUMSA-led work stoppages in the month. Base effects will also act downwards on the y/y result; in July last year, manufacturing output rose by a robust 4.9% on a seasonally adjusted basis. Weak output results would be rand negative to the extent that they would speak to export constraints, as well as a central bank that is reluctant to tighten monetary policy.

With regards to international data releases, inflation numbers for China were released overnight. The data confirmed a relatively benign inflation outlook, notwithstanding some upside in the pipeline due to rising pork prices and utility price changes. It remains unlikely that inflation will become a major policy issue over the next few quarters. CPI inflation fell to 2.0% y/y in August from 2.3% y/y in July, and below analyst expectations for a drop to 2.2% y/y (Bloomberg consensus). PPI inflation pushed deeper into deflationary territory at -1.2% y/y from -0.9% y/y. This was also lower than analysts had anticipated (-1.1% y/y).

The international data calendar is fairly sparse, although ECB President Draghi does speak later today. It comes a day ahead of the meeting of Eurozone finance ministers and central banks. A key issue at tomorrow’s meeting will be whether Eurozone officials are willing to embrace the sorts of fiscal flexibility/activism that Draghi has espoused in recent weeks. Draghi has essentially argued that monetary policy cannot do everything and, while Eurozone countries need to stick broadly to their deficit-cutting plans (for those needing to reduce deficits), some flexibility should be employed to try to lift growth in the region. Steve Barrow (our G10 Strategist) notes that, usurprisingly, there already seems to be considerable reticence to embrace this idea in Germany, and so it will be interesting to hear from Draghi’s speech tonight whether he continues to push these fiscal ideas, or backs off a bit. Steve suspects he will continue to push, but also believes that German resistance will be pretty stubborn. Steve’s view is that, if monetary policy is nearing exhaustion and large-scale fiscal stimulation is a non-starter, the exchange rate should be used as a tool to lift inflation. It is always hard for Draghi or other ECB members to embrace this idea, not least because exchange rate policy is essentially a collaborative effort between the ECB and Eurozone governments. Again, German reservations at both the Bundesbank level and finance minister level may prevent any exchange rate activism. This being said, with the ECB and Eurozone meeting over the weekend, it will be interesting to see if the official tone towards the euro becomes a bit more dovish after the meeting.


FI

Today, we start seeing some of the Q2 production data for the economy, with the release of mining (Consensus -6.7% y/y, vs -5.7% prior) and manufacturing (Consensus -5.8% y/y, vs +0.5% prior) production numbers. Mining data should still be partly affected by the platinum strike, while the manufacturing data is expected to be severely affected by the metal workers strikes. This morning back-end bonds have opened slightly stronger and front-end bonds slightly weaker. EM sentiment is likely to rule the day, though a large part of the SA market may be absorbed in the reporting of the Oscar Pistorius trial.

Turnover yesterday appears to be around ZAR26bn in the nominal bond market. Some trades appear to have been misreported to the JSE, which is skewing some of the overnight data. The R186 (ZAR11.6bn), R209 (ZAR3.2bn), R2023 (ZAR2.3bn) and R214 (ZAR1.9bn) led the turnover numbers. We have tried to strip out the incorrect trades from today’s reporting. The curve flattened into rand weakness, as markets increased the probability of the SARB hiking rates on the back of a weaker currency. Front end bonds weakened, while bonds from the R186 and further out strengthened slightly. The front-end R186/R203 spread flattened by 2 bps, the belly R213/R186 by 3 bps and the back-end R2048/R186 flattened by 4 bps. FRAs followed the currency and front-end bonds higher. Around 9 bps of hikes is priced into the 1x4 for next week’s MPC meeting. However, as we have previously mentioned, 3m Jibar is also 17.5 bps higher than after the July MPC meeting, suggesting that the combination of Jibar and FRAs are pricing in a hike.

Non-residents were significant net sellers of nominal SAGBs yesterday for a total of -ZAR2.13bn. Net selling was recorded in all four maturity categories, but was most pronounced at the long-end (12+ year segment). Foreigners sold -ZAR1.40bn in the 12+ year segment, with a substantial -ZAR1.01bn sold in the R186, while notable outflows were also recorded in the R2037 (-ZAR199m), R209 (-ZAR181m) and the R2030 (-ZAR151m). This was partially offset by net buying in the R214 (+ZAR194m) within this longer-dated segment. Foreigners sold -ZAR387m in the R2023 in the 7-12 year segment, and -ZAR187m in the 3-7 year segment, due mainly to net outflows of -ZAR195m recorded in the R208. -ZAR154m was sold in the R159 in the 1-3 year segment.

After two days of bear flattening, the US Treasury curve bear steepened yesterday, as yields across the curve increased. At the short-end, the 2yr UST rose by the smallest increment of 1.21 bps to 0.57%, and the yield on the 5yr UST rose by 2.66 bps to a yield of 1.79%. At the longer-end, the 10yr UST note increased by 3.78 bps to 2.54%, while the 30yr note rose by the largest increment, of 3.84 bps to 3.27%.

EM FI markets continued to sell off on balance yesterday. 5yr local currency sovereign yields rose by 2.63 bps on average, and 10yr yields rose by 2.32 bps on average. SA’s FI market recorded a weak performance, but outperformed relative to the EM average, with the 5yr yield rising by 2.00 bps and the 10yr yield rising by 0.90 of a bp. Larger moves weaker were recorded across other EMs that we monitor for the purposes of this report. In the 5yr space, Russia recorded the largest move weaker (+13.34 bps), followed by Hungary (+5.00 bps), and Indonesia (+2.30 bps). In the 10yr space, the moves weaker were more pronounced and were also led by Russia (+11.74 bps), followed by Hungary (+10.00 bps) and Indonesia (3.30 bps). Russia’s Finance Ministry cancelled its weekly OFZ bond auction yesterday, citing “unfavourable market conditions”.

The pace of rand depreciation moderated yesterday, with larger moves weaker seen across some of the other EM currencies we monitor for the purposes of our reports. The rand depreciated by a marginal 0.05% yesterday, while the Russian ruble led the moves weaker, depreciating by 0.75%. The Indian rupee recorded a 0.58% depreciation and the Indonesian rupiah depreciated by 0.37%. Other EM currencies to depreciate on the day were the Thai baht (0.26%), and the Brazilian real (0.17%). In contrast, the Hungarian forint (0.42%), Turkish lira (0.18%) and Mexican peso (0.08%) appreciated yesterday.

Bank Indonesia (BI) will conclude its monetary policy meeting today. Bloomberg consensus forecasts are calling for an unchanged reference rate, which currently sits at 7.50%.

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