Standard Bank Research Team
Standard Bank
FX
On Friday the PBOC announced that they would reduce the benchmark lending rate by 40 bps, while at the same time reducing the deposit rate by 25 bps. The decrease in the benchmark interest rates come on the back of rising concerns over the cyclical slowdown in the Chinese economy. The latest data from China – such as the HSBC Flash PMI numbers which indicated that the Chinese manufacturing sector most likely remained on the brink of contraction during November – remains a concern for domestic policy-makers.
The rate cut came largely unexpected and markets initial read on the move was very positive. Equity markets and the rand rallied on this news. The S&P closed 0.52% higher, the JSE All share index closed 3.21% higher and the rand rallied against the dollar from around 10.99 to as low as 10.91 on the back of this news. Commodity markets also rebounded, with crude oil, base metals and even precious metals seeing good buying interest on Friday afternoon. Asian equity markets have followed through with the rally this morning, with all benchmark indices in positive territory.
That said, the rally in commodities is already fading this morning, as the rate cut is interpreted as insufficient to bolster demand for commodities substantially and sustainably, at this stage. While lower interest rates in China may increase borrowing and consumption, the construction sector (which is by far the largest consumer of commodities) remains under pressure, largely due to oversupply of housing in our view rather than a lack of demand (because of tight credit). With commodity prices under pressure, we may see the rand give up some of Friday’s gains.
On the domestic front, we are seeing the usual month-end deluge of macroeconomic data for South Africa, as well as the release of Q3:14 GDP by Stats SA. Of particular interest for rand market participants will be SA’s trade balance for October. The trade balance remains the best indicator of the current account, albeit an extremely volatile data series. Bloomberg consensus is for a print of -R6.0bn, compared to September’s print of -R2.9bn. The September print was significantly tighter than the consensus estimate of -R11.5bn and, as Kim Silberman notes, this was significant as “it is the first month of 2014 for which we have export data which is not affected by strike activity”.
Kim noted that the September trade data showed exports accelerating by 19.6% y/y, while imports grew by a comparatively smaller 6.8% y/y. Markets will be watching for further signs of the weaker rand improving export competitiveness and see this as a sign towards Q4’s current account. Another print that comes in better than consensus could add support to the rand.
The monthly fiscal deficit data has taken on more of an importance, since the MTBPS, as it is the most reliable data to judge whether NT is managing to cut back on its expenditure. The October figure will be first fiscal figure since the MTBPS and our forecast for the print is -R28.56bn, worse than the prior month’s -R5.36bn, which had surprised to the tighter side. The wider deficit in October would be in line with historical trends (Figure 3). Should October print in line with our forecast, it would take the cumulative fiscal year deficit to -R145.71bn, compared to -R140.26bn for the same period last year, or 3.89% wider. The September deficit figures showed that expenditure is running slightly behind last year’s figures and revenue is also behind last year’s figures: at the end of September, revenue raised was 45.2% of the Budget, vs 45.8% at the same time in 2013/14. Expenditure is now 48.3% of the Budget, compared to 48.4% in 2013/14.
Turning to GDP, Bloomberg consensus for Q3:14 GDP growth is currently +1.4% y/y, compared to the prior quarter’s +1.0%. Standard Bank’s economist Kim Silberman forecasts a below-consensus print of +0.8% y/y. The range of estimates in Bloomberg contributing to the +1.4% is from +1.1% to +2.6% y/y. Standard Bank’s forecast for GDP growth in 2014 is 1.4%, in line with the SARB’s revised forecast for the year.
In addition to the above data, M3 money supply and private sector credit extension (PSCE) growth for October will also be published. Consensus estimates put money supply growth at 8.08% y/y, and PSCE growth at 9.00% y/y. Of particular interest to us will be the spilt between credit extension to households and to corporates. Household credit extension has slowed substantially in the past few months and the aggregate number has been held up by credit extension to corporates. Any sustainable slowdown in lending to corporates may add downward pressure to overall credit growth. Ultimately, slower credit growth would a drag on consumer spending.
The rand strengthened modestly against the US dollar on Friday, closing at USDZAR10.95, compared with Thursday’s close of USDZAR10.96. Rand appreciation against the dollar occurred despite dollar strength against most of the major crosses; the dollar gained ground against the euro and the pound, but weakened against the yen. The rand strengthened against all of the major crosses, with the biggest move seen against the euro (1.3%). The euro came under pressure on Friday after dovish comments by ECB President Draghi. Appreciation of the local currency against the dollar occurred alongside strength amongst all but one of the commodity currencies and most of the EM currencies we look at for the purposes of this report. The rand put in the second-worst performance among the commodity currencies, just ahead of the NOK (the only currency in the category to depreciate). In the EM category, the rand was fourth from last – ahead of the THB, TRY and HUF. The TRY and HUF were the only EM currencies to depreciate against the dollar. The rand traded between a low of USDZAR10.9060 and a high of USDZAR10.9933 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 mostly higher on the day. Oil and platinum led the way again, climbing 1.3% and 1.2% respectively. Gold rose 0.6%, while copper fell 0.2%. The developed market MSCI and the EM MSCI were both up, rising 0.7% and 1.4% respectively. Taking the lead from international markets, the ALSI gained 3.2%. Both the EMBI spread and SA’s 5yr CDS spread narrowed by 5 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell 5.0%.
Non-residents were net sellers of local equities (-ZAR961 million) and more aggressive net sellers of local bonds (-ZAR1 394 million). Selling of bonds was seen in the 12+ (-ZAR1 861 million) and 1-3 (-ZAR38 million) year buckets. Buying was seen in the 7-12 (ZAR471 million) and 3-7 (ZAR33 million) year segments. Bond yields fell by between 1 bp (R214) and 5 bps (R208). The 3x6, 6x9 and 12x15 FRAs fell by 2 bps, 1 bp and 3 bps respectively. 3m JIBAR fell 1 bp.
Latest SA publications
SA Fixed Income Weekly: Bond rally into year-end by Asher Lipson (21 November 2014)
Credit & Securitisation Weekly: Issuers return to local DCM by Robyn MacLennan, Steffen Kriel and Varushka Singh (21 November 2014)
SA FX Weekly: SARB: lower oil, higher tolerance for ZAR weakness? by Marc Ground (17 November 2014)
Credit & Securitisation Monthly: Moody’s downgrades SA by Robyn MacLennan, Steffen Kriel and Varushka Singh (11 November 2014)
Credit & Securitisation Flash Note: Transnet SOC Ltd by Robyn MacLennan and Steffen Kriel (31 October 2014)
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