FX

The SARB left the repo rate unchanged at 5.75% at the conclusion of its November MPC meeting. This was in line with consensus expectations and with our view. According to the Bloomberg consensus poll, 20 out of 27 analysts had expected that the SARB would stay on hold. The remaining seven had though that the bank would hike the repo rate by 25 bps. It is possible that those expecting a hike felt that new leadership at the SARB, and a thus altered MPC, could tilt the committee’s bias to the hawkish side. While accepting that this development would not be immaterial to the outcome, we thought that it would be stretch to argue that there would be a step-change in the SARB’s policy response function. During the Q&A session, Governor Kganyago affirmed our assertion by stating quite categorically that he would do “nothing” differently and build on the base that had been established. The MPC’s decision was unanimous this time – a direct reference to this was for the first time included in the post-meeting statement. At the September meeting, one committee member had called for a hike (of 25 bps). The other six were in favour of no change in the policy rate.

The tone of the statement was decidedly less hawkish than in September. Once again, this was evident in interest rate friendly adjustments to official inflation and growth forecasts. This time though this shift in tone was particularly underscored by adjustments to the bank’s assessment of risks to their forecasts. The statement described the revised headline inflation trajectory as “improved”, compared with September. The bank marginally lowered its headline inflation forecast for 2014 to 6.1% from 6.2%. Forecast averages for 2015 and 2016 were revised more significantly lower – by 0.4 and 0.3 of a pp to 5.3% and 5.5% respectively. The bank expects that inflation will average 5.9% in Q4:14, and that it will continue a “downward trend” into next year, reaching a low of 5.1% in Q2:15. The bank did not specifically mention, as it has before, when it anticipated inflation to trend back within the target bands. However, the trajectory it has outlined implies that it might expect that headline inflation will not again breach the target ceiling – at least not for more than one month. Revisions to the inflation outlook were described as “mainly due to the impact of declining international oil prices".

Significantly, the risks to the headline inflation outlook were no longer assessed to be to the upside but were now deemed to be “more or less balanced”. The bank still felt that the upside risk from the exchange rate remained, mostly as result of the currency’s vulnerability to “changing perceptions of the timing of global monetary policy adjustments, and the slow pace of contraction in the current account deficit”. Wage increases in excess of inflation and productivity growth were also mentioned as an upside risk to the bank’s view on headline inflation. However, these were seemingly outweighed by the downside risks stemming to some extent from (a) the possibility that oil prices remain at current levels, but perhaps more significantly from (b) the absence of excess demand pressures and constraints on household consumption expenditure. The bank described the domestic growth outlook as “challenging”. Once again, the SARB revised is growth forecasts lower. Its projection for GDP growth in 2014 was trimmed to 1.4% from 1.5%. Forecasts for growth in 2015 and 2016 were also revised lower, to 2.5% (from 2.8%) and 2.9% (from 3.1%) respectively. The bank assesses the risks to its growth outlook as being “moderately on the downside”.

Despite a less hawkish tone, the MPC was still “of the view that interest rates will have to normalise over time”. Although it was not clarified this time, at the post-meeting Q&A session in September this phrase was explained as implying that the committee still felt that this was a hiking cycle. The bank acknowledged the offsets that monetary easing by the ECB and BoJ could have with respect to Fed policy normalisation (and that this itself could be delayed given a more benign inflation outlook here). However, the bank remained sceptical that this would offer a complete offset, saying that “the rand is likely to remain more sensitive to changes in financial conditions in the US than in Japan and the Eurozone”. The argument to take rates up in SA as the Fed tightens policy is premised on the idea that a narrowing interest rate differential will cause the rand to weaken, and that a weakening rand will – in turn – act upwards on inflation. However, the SARB would need to take into account what has happened to other inflation drivers, such as international oil and food prices, as well as local demand pressures. It would also need to take into account how the rand had done on a trade-weighted basis, and not only how it had performed against the US dollar. Consequently, the SARB’s reference to policy being normalised “over time”, to our minds (like the Fed’s “considerable time” reference) is not meant to convey a time dependency of future rate hikes. Rather, like the Fed, the SARB’s decisions will be data-dependent, specifically with regard to inflation, “the evolution of inflation expectations” and the “state of the domestic economy”. During the Q&A session, Governor Kganyago underscored this point by saying that discussions around pre-empting US monetary policy were not to his mind useful, and that policy decisions at each meeting would be made taking into account, among other factors, the global monetary policy settings at that point in time.

Not much on the international calendar today, except for central bank speakers. ECB President Draghi will speak this morning on the subject of “Reshaping Europe” at the European Banking Congress. Other ECB members, Nouy and Weidmann, speak at the same meeting later in the morning. Steve Barrow (our G10 FIC Strategist) suspects that Draghi’s comments will probably be very wide-ranging and not specific to the monetary policy debate at the moment. As for Nouy and Weidmann, they’re down to talk about issues such as banking union and regulatory reform and, if they stick to that script, they are unlikely to throw up anything that really interests the market.

The rand strengthened against the US dollar on Thursday, closing at USDZAR10.96, compared with Wednesday’s close of USDZAR11.06. This is the first time that the rand has closed below the USDZAR10.00 level this month. Rand appreciation against the dollar occurred despite dollar strength against most of the major crosses; the dollar gained ground against the yen and the euro, but weakened against the pound. The rand strengthened against all of the major crosses, with the biggest move seen against the yen (1.1%). Appreciation of the local currency against the dollar occurred alongside strength amongst all the commodity currencies we monitor, and a mostly stronger performance among the EM currencies we look at for the purposes of this report. The rand put in the best performance among the commodity currencies, and second-best in the EM category (behind the RUB). The rand traded between a low of USDZAR10.9368 and a high of USDZAR11.0903 intraday. Support from where the rand opened this morning sits at 10.9200, 10.8500, 10.7700 and 10.6500. Resistance levels sit at 11.000, 11.1300, 11.2000, 11.3250 and 11.4000.

Commodities were all higher on the day. Platinum and oil led the way, climbing 2.1% and 1.6% respectively. Gold and copper rose 0.9% and 0.1% respectively. The developed market MSCI and the EM MSCI were both up marginally (less than 0.1%). The ALSI fell 1.8%. The EMBI spread widened by 1 bp, while SA’s 5yr CDS spread narrowed by 3 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell 2.7%.

Non-residents were net sellers of local equities (-ZAR383 million) and net sellers of local bonds (-ZAR323 million). Selling of bonds was seen in the 7-12 (-ZAR822 million) and 1-3 (-ZAR119 million) year buckets. Buying was seen in the 12+ (ZAR530 million) and 3-7 (ZAR88 million) year segments. Bond yields fell by between 4 bps (R208) and 6 bps (R214). The 3x6 and 12x15 FRAs both fell by 7 bps, and the 6x9 FRA dropped 8 bps.


FI

This morning, we have opened marginally stronger after already big moves after yesterday’s MPC. The SARB kept the repo rate unchanged at 5.75%, as we had expected. Significantly, the overall risk to inflation is now “more or less balanced”, compared to previous meetings when the risk was “skewed to the upside”. The SARB also downgraded its growth and inflation forecasts, with the lower forecasts suggesting a reduced stagflation dilemma for the reserve bank. Importantly, the previous standout hawkish vote from the committee was removed, with the vote being unanimous. The seasonality in SAGBs and USDZAR towards the end of December still suggests a tactical positioning of staying long bonds.

An hour before the SA MPC, the Turkish Central Bank kept rates on hold as well. The benchmark repo was left at 8.25%, the overnight lending rate at 11.25% and overnight borrowing rate at 7.50%. EM FX rallied on the back of this decision. The bank noted that the “current levels of commodity prices, in particular declining oil prices, are expected to contribute to disinflation foreseen for the next year”. The committee also stated that they expect “inflation will decline in line with the forecast presented in the Inflation Report throughout 2015”. The SARB reiterated a similar story, with the inflation forecasting improving “mainly due to the impact of decline international oil prices”.

Yesterday saw turnover of around R21.7bn in nominal SAGBs, with 39% of turnover due to trade in the R186, 11% from the R2030, 10% from the R209 and 13% coming from Tuesday’s auction stock and non-comp takeup. Non-comp takeup for the full 50% with R403m in the R2032, R377m in the R2037 and R402m in the R2048. Offshore investors were recorded as net sellers of -R323m in SAGBs, with R952m bought in the R186, R251m bought in the R214 and R165m in the R2048. This was offset and overwhelmed by selling in the R2023 (-R822m), R2030 (-R671m), R2037 (-R203m) and R207 (-R130m). The curve bull flattened, with back-end bonds moving 6.0 bps lower and the R186 moving 5 bps. All FRAs shifted lower by 8 – 11 bps, as the curve repriced.

US Treasuries also strengthened overnight, with the 10yr UST moving 2.2 bps lower to trade at 2.33% this morning. This should give further strength to SA rates this morning. Local currency sovereign EM FI strengthened on average yesterday, with -3.4 bps and -5.8 bps moves in the 5yr and 10yr maturities respectively. Turkey led the stronger moves in both tenors after the central bank kept rates on hold, while SA was the second-best performer in the 5yr debt space and the third-best in the 10yr space. Hungary led weaker moves in both tenors.


Latest SA publications

SA FX Weekly: SARB: lower oil, higher tolerance for ZAR weakness? by Marc Ground (17 November 2014)

SA Fixed Income Weekly: No SARB hike foreseen by Asher Lipson (14 November 2014)

Credit & Securitisation Monthly: Moody’s downgrades SA by Robyn MacLennan, Steffen Kriel and Varushka Singh (11 November 2014)

Credit & Securitisation Weekly: Fitch affirms Eskom by Robyn MacLennan and Steffen Kriel (31 October 2014)

Credit & Securitisation Flash Note: Transnet SOC Ltd by Robyn MacLennan and Steffen Kriel (31 October 2014)

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