Standard Bank Research Team
Standard Bank
FX
This week sees Lesetja Kganyago host his first MPC as SARB governor; Gill Marcus’s term ended in early November. We stick with our view that the SARB will keep rates on hold at 5.75% this week. The median forecast according to the October Reuters survey was for a 25 bps hike in November (16 out of 26). However, the Bloomberg poll, which reflects more up-to-date views (submissions were made last week), shows a much smaller number of analysts now predicting a rate hike (6 out of 23). The major impetus for this change in analysts’ views has most likely been considerable and persistent weakness in global oil prices; this has definitely galvanised our expectation. While the SARB might not take the full extent of this fall into account when determining its outlook on local inflation (perhaps concerned about its sustainability), it is reasonable to think that this might prompt a downward revision to its inflation forecast or, at the very least, allow the SARB to keep its forecast unchanged and express this rather as a downside risk to its outlook. We think that he MPC will be hard-pressed to justify taking another pro-cyclical hiking step, unless it is required at one meeting or another to push its inflation forecast up again (as was the case in July).
Local inflation data will be published on Wednesday, a day before the MPC announcement. SBGS economist Kim Silberman expects headline inflation to rise to 6.0% y/y in October from 5.9% y/y in September, mostly as a result of petrol-price inflation. Kim notes that although the petrol price rose by only 2c/l in October, due to base effects the petrol price inflation rate accelerated from 1.05% y/y in September to 2.7% y/y. This on its own will have added 0.09 percentage points (ppts) to the headline print for October. Kim has forecast food inflation to remain flat at 8.7% y/y in October, averaging 8.3% y/y in Q4:15 and 6.2% y/y in Q1:15; however, risks are to the upside due to the feed-through from higher wheat and maize prices in the first quarter of this year.
Economic data releases on the international front were a bit thin on the ground last week but there’s a lot more to look forward to this week, according to Steve Barrow (SBR’s G10 FIC Strategist). As a start, today we have US October industrial production data. The consensus is for 0.2% m/m, but Steve notes that there is quite a skew to the upside. The Bloomberg survey, for instance, shows that twice as many see a number above 0.2% m/m as see something below the consensus. Steve would agree that the risks are skewed to the high side.
Any impact from US industrial production data could be negated by ECB President Draghi who speaks at the same sort of time to the EU parliament. At the post-ECB press conference, he stressed two main things. The first was that the ECB has tasked staff members to ready additional easing steps – should such steps be needed. The second key point was the divergence between the ECBs policy and that of the Fed. It’s probably obvious to most what these two things mean but any extra clarity today could be much appreciated by the market.
The rand strengthened against the US dollar on Friday, closing at USDZAR11.08, compared with Thursday’s close of USDZAR11.21. Rand appreciation against the dollar occurred despite dollar strength against most of the major crosses – the dollar gained ground against the pound and the yen, but weakened against the euro. The rand strengthened against all the major crosses, with the biggest move seen against the yen (1.6%). Strength of the local currency against the dollar occurred alongside widespread strength amongst the commodity currencies we monitor for the purposes of this report and a mixed to stronger performance among the EM currencies. The rand put in the best performance in both categories. The rand traded between a low of USDZAR11.0714 and a high of USDZAR11.2449 intraday. Support from where the rand opened this morning sits at 11.0000, 10.9600, 10.9200 and 10.8500. Resistance levels sit at 11.1300, 11.2000, 11.3250 and 11.4000.
Commodity prices were higher on the day. Gold and platinum climbed 2.3% and 1.5% respectively. Brent was up 1.9%, while copper was only marginally higher (0.1%). The developed market MSCI was up 0.1%. However, the EM MSCI was down again, losing 0.2%. The ALSI was largely unchanged. The EMBI spread widened by 4 bps and SA’s 5yr CDS spread widened by 3 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell 3.5%.
Non-residents were net sellers of local equities (-ZAR211 million) and slightly more aggressive net sellers of local bonds (-ZAR358 million). Selling of bonds was seen in the 12+ (ZAR344 million) and 1-3 (-ZAR206 million) year buckets. Buying was concentrated in the belly of the curve; in the 3-7 (ZAR139 million) and 7-12 (ZAR52 million) year segments. Bond yields fell by between 2 bps (R203 and R208) and 5 bps (R214). The 3x6 FRA fell 2 bps, with 6x9 and 12x15 FRAs both losing 3 bps.
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