FOMC and SARB meetings this week; we expect the SARB to stay on hold

• It is the SARB’s MPC and the Fed’s FOMC meetings this week. We expect the SARB to remain on hold.

• We would await the statement from this week’s FOMC meeting to confirm if the committee’s general feeling around tightening has changed from the last meeting in December. Any change here that would be perceived as a dovish shift in the committee’s consensus would likely be rand-positive.

• We expect trade balance of R2.1bn for December, and a deficit of -R25bn for Q4:14 as a whole. Should the trade balance print in line or better than our expectations, we would expect the rand to find strength. That said, we caution that this strength may fade given that the December number might mask the fact that the overall trade balance for the quarter as a whole would likely have been a major drag on the current account of Q4:14.

• We expect local bonds to take stock after the EM rally on Friday and the weekend’s elections in Greece. Things should also be fairly quiet going into the Fed decision on Wednesday and SARB decision on Thursday. We do not expect the SARB to move on rates.

• Technicals for the rand suggest that support levels, from where the rand opened this morning, are at 11.3600, 11.2500 and 11.1500. Resistance levels are at 11.4200, 11.4800 and 11.5300.

• From our Fixed Income Weekly: We remain bullish on bonds in H1:15 and expect the R186 to fall below 7% in Q2. Our recommendation is underweight the 1-3yr and 3-7yr buckets, and overweight the 7-12yr and 12+yr buckets.

• From our FX Weekly: Our USDZAR forecast for Q1:15 is 11.50, with a weakening bias remaining in place for the rest of the year. We pin our Q4:15 forecast at 11.75. We point out that these represent the midpoints of a fairly wide anticipated trading range.

International developments

Financial markets this morning will focus on the Eurozone and Greece. As largely anticipated, the opposition party Syriza has defeated the incumbent New Democracy in Greek elections held yesterday. Syriza’s leader, and now Greek Prime Minister-elect, Alexis Tsipras, has already pledged to form a coalition government dedicated to ending austerity. Uncertainty here could weigh on the euro and, more generally, could also heighten risk aversion to the disadvantage of the rand against the dollar.

The FOMC meets this week (27 to 28 January). Whereas it might have been expected that oil price weakness and its impact on inflation would cause a delay in Fed policy normalisation, it seems as though the committee, at its last meeting, still felt that things remained largely on course. However, we would await the statement from this week’s meeting to confirm that this is still the committee’s general feeling. Any change here that would be perceived as a dovish shift in the committee’s consensus would likely be rand-positive. In terms of the impact of lower oil prices on the economy, the committee’s view is that this “is likely to be, on net, a positive”.

For today, the only notable release Germany’s IFO survey. Steve Barrow (our G10 FIC Strategist) thinks that it should show another increase. Steve notes that all the main IFO indicators have started to recover recently and expects this to continue. Last week we saw another German survey, the ZEW survey surge but Steve thinks that this survey will have been helped by expectations of QE from the ECB, whereas the IFO survey will likely show a much more modest impact from this source. Nonetheless, Steve still thinks that the impact from this – plus lower oil – should be sufficient to mean an upside risk to the 106.5 Bloomberg consensus for the main IFO business climate index. That could lift the euro, if correct, although it clearly seems as if the market is forgetting about the data for now and, instead, focusing on the currency consequences of the ECB’s QE – which is undoubtedly negative. In addition, we have the Greek election results likely placing an added drag on the common currency.

Local developments

Before the first Monetary Policy Committee (MPC) meeting this week, Stats SA will release the December PPI data on Thursday at 11:30. Bloomberg consensus expectations are for PPI inflation to have moderated to 6.0% y/y in December from 6.5% y/y in November.

The SARB convenes for its first MPC meeting this week and is expected to announce its decision on interest rates on Thursday at 15:00. Bloomberg consensus, in line with ours, is for the repo rate to remain unchanged at 5.75%.

We would expect the SARB to adjust their inflation forecast lower for 2015. Our focus would also be on the SARB’s 2016 forecast for headline inflation which may not necessarily be adjusted lower. In fact, 2016’s inflation forecast may actually rise due to a lower base in 2015. We would also closely monitor the SARB’s statement on its view on core inflation and inflation expectations.

However, we still think that there may be a burst of rand weakness sufficient to provoke another pro-cyclical tightening step of 25 bps in H1:15 — although we acknowledge that the disinflationary impact of lower oil prices raises the SARB’s implicit tolerance for currency weakness, making such a move less likely than before.

The Reserve Bank also releases the December money supply (M3) and private sector credit extension (PSCE) numbers on Friday morning at 08:00. Both M3 growth and PSCE growth likely increased further in December. M3 growth is expected to have improved to 8.5% y/y in December, while PSCE growth is expected to have increased to 9.2% y/y in December from 9.1% y/y in November.

This week also sees SARS releasing its final trade balance print for 2014. Bloomberg consensus has pencilled on a narrowing of the -ZAR5.7 billion in November to a surplus of ZAR1.6 billion in December. We expect a surplus of ZAR2.1 billion. Our economist Kim Silberman expects the value of exports to have grown by 3.7% y/y (-4.0% m/m), to around ZAR80.5 billion in December. This takes into account a potential fall in the value of mineral and base metal exports due to the 50% y/y decline in the price of iron ore and 12% y/y decline in the price of coal. The value of precious metal exports is also expected to have been affected by the 2% y/y fall in the gold price and 11% fall in the platinum price.

Kim also expects the value of imports to have grown by 4.5% y/y (-13% m/m), to around ZAR78 billion for the month. This takes into account Eskom’s increased demand for diesel, which estimate was 30% more than in December 2013, as well as the 50% y/y decline in the oil price. The net effect should result in R5Bn less mineral imports than in December 2013. In addition we account for the effect of an 11% y/y depreciation in the currency on both exports and imports.

As such, we expect the trade balance for December will record a surplus of ZAR2.1 billion, versus a surplus of ZAR2.6 billion in 2013. If we are correct, this would result in a cumulative trade deficit of ZAR25 billion in Q4:14, triple the ZAR8.5 billion deficit recorded in Q4:13. This does not bode well for the current account deficit in Q4:14, which we think will be wider than the 5.3% of GDP recorded in final quarter of 2013, and that it will be closer to 6.2% of GDP.

Should the trade balance print in line or better than our expectations, we would expect the rand to find strength. That said, we caution that this strength may fade given that the December number might mask the fact that the overall trade balance for the quarter as a whole would likely be a major drag on the current account of Q4:14. But we would also read the trade data in conjunction with the Fed and SARB meeting outcomes. Should the SARB’s statement on Thursday be interpreted as largely unchanged from the last meeting in December, and the Fed is somewhat more dovish than before, a good trade number may add more strength to the rand than would otherwise have been the case.

Markets

The rand weakened, albeit negligibly on Friday, closing at USDZAR11.41, compared with Thursday’s close of USDZAR11.40. The slight rand depreciation occurred in line with dollar strength against most of the major crosses; the dollar strengthened most against the euro (1.4%) and the pound (0.2%), but weakened against the yen (-0.6%). The rand strengthened against some of the major crosses, with appreciation seen against the euro (1.3%), the pound (0.1%), the yen (1.4%); the rand weakened against the dollar (-0.04%) and more so against the yen (-0.7%). The rand put in the best performance amongst the commodity currencies we monitor and the third-best performance amongst the EM currencies, behind the RUB and the BRL. The rand traded between a low of USDZAR11.3762 and a high of USDZAR11.4819 intraday.

High turnover was recorded in the market on Friday, R28.6bn in nominals, R2.2bn in ILBs. 33% of turnover came from the R186, 12% from each of the R204 and R207 and 11% from the R209. Offshore investors were net sellers of -R2.2bn of nominals according to the JSE. However, the data records -R2.6bn of R204, but then -R1.0bn of R204 was booked as a back dated equal and opposite trade, reversing earlier deals. This suggests that offshore only sold -R1.2bn on Friday. The R203 was net sold for -R872m, the R2023 for -R210m and the R2032 for -R180m. The offset was the R186, which recorded buying of +R1.3bn by offshore and R475m of the R214 was bought.

The local curve rallied aggressively on Friday. Almost the entire curve shifted 9.5 – 11.0 bps lower, apart from very front-end bonds. The moves were led by the R2023 and R214, which moved 11.0 bps lower, while the benchmark R186 moved 10.0 bps stronger. FRAs continued their march lower; a 25 bps cut is priced in with almost 100% probability of the next seven months.

US Treasuries rallied on Friday, as the curve flattened. The 10yr UST moved 6.6 bps and has subsequently rallied further, trading at 1.76% this morning. Friday was a good day for EM rates, with 5yr and 10yr local currency sovereign bonds rallying by an average of -13.5 and -12.0 bps respectively. This was likely a reaction to the ECB’s QE announcement. Moves were led in both tenors by Hungary and Russia, with both countries seeing bonds move by more than 25 bps. South Africa slightly underperformed the EM average in both maturities.

The weekend also witnessed another EM rate cut, as Pakistan cut by 100 bps. December’s CPI in the country was 4.3% y/y, after November’s 3.96%. Six out of 13 economists on Bloomberg had expected the move.

Commodities were mixed on the day. Gold and platinum were down up on the day, falling by 0.6% and 1.4% respectively. Copper also fell on Friday, by a larger 2.6%. Brent was up by 0.6% to close at $48.79/bbl. The developed market MSCI was down by 0.2% on Friday, while the MSCI EM was up by 0.8% on the day. The ALSI fell by 0.1% on the day. Non-residents were net buyers of equities on Friday (ZAR 781 million). Both the EMBI and SA’s 5yr CDS spread narrowed by 6 bps. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, increased by 1.6% yesterday.

Latest SA publications

SA FX Weekly: ZAR: another year on the back-foot by Marc Ground and Shireen Darmalingam (23 January 2015)

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SA FIC Thematic: Ratings matter; a quantitative approach by Walter de Wet, Asher Lipson and Shireen Darmalingam (21 January 2015)

SA Fixed Income Weekly: Disinflation in H1 2015 by Asher Lipson (16 January 2015)

Credit & Securitisation Weekly: Mounting pressure on Eskom by Steffen Kriel and Varushka Singh (16 January 2015)

SA Fixed Income ALBI note: ALBI MD to increase in February by Asher Lipson (9 January 2015)