Rand range-bound as Eskom load-sheds

US data releases dominate the calendar today, with consumer confidence and durable goods the main focus.
Markets are awaiting the FOMC meeting, due to start today and end tomorrow. There is no scheduled press conference for this meeting.
We expect the SARB to keep the repo rate unchanged this week. Core inflation and inflation expectations remain a concern.
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.
Industrial and bulk commodities remain under pressure as China’s demand slows, with iron ore falling to below $64/mt — its lowest level since 2009.
Markets seemed generally unperturbed by the Greek election result yesterday, with equity markets in Europe and the US closing higher. The VIX index declined to 15.52.
Domestic markets are likely to be weighed upon by Eskom load-shedding. The power utility went to stage 2 yesterday, and expects demand to exceed supply this week. Eskom expects a medium- to high chance of power blackouts today.
National Treasury will auction R900m of R2030, R800m of R2032 and R650m of R2044 today. Demand for the R2044 could be boosted by its upcoming inclusion in the ALBI at the beginning of February.
The rand remains range-bound, trading at 11.4500 this morning, marginally below our mid-point for this quarter at 11.50.
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.

International developments

S&P downgrades Russia’s foreign currency sovereign rating to non-investment grade assigning a rating of BB+ with a negative outlook. The agency cited a decline in the country’s monetary flexibility and growth prospects. S&P anticipates that this may reduce further therefore the negative outlook.

This was largely anticipated by the market and is clear when one view the 5-year USD CDS for Russia which moved from 250 bps at the end of October to above 450 bps by year-end. Yesterday, the CDS traded above 590 bps.

So far, there has been very little contagion from Russia to other EM economies, with bond yields and currency behaving well. We also do not anticipate that the downgrade by S&P will affect the ZAR negatively at this stage. We do note that the other two major rating agencies, Fitch and Moody’s, still have the country rated one notch higher than S&P, although both Fitch and Moody’s have the country on a negative outlook.

The international calendar is dominated by US data flow today, with durable goods orders and consumer confidence among the highlights. However, given the proximity to the Fed’s post-meeting statement tomorrow, the impact of these numbers on markets could be limited. US durable goods orders are expected to rise 0.3% m/m; partially reversing a 0.7% decline in November. Excluding transportation the rise is seen a bit better – at 0.6% m/m which more than compensates for the 0.4% m/m slide in November. Steve Barrow (our G10 FIC Strategist) thinks there is a downside risk to the numbers. The Conference Board’s consumer confidence reading is expected to rise to 95.5 in January from 92.6 in December, boosted by falling gasoline prices and a stronger jobs market.

UK GDP data will also be published today and is seen easing down slightly to a 0.6% q/q from 0.7% q/q in Q3:14. That would leave the annual growth at 2.8% y/y after 2.6% y/y last time. Steve notes that in the Bloomberg poll 70% of analysts go for 0.6% for the quarterly rise but, of those that disagree, there’s a 4:1 bias to the high side and Steve would go along with the idea that the data could be a bit firmer than the consensus. If that’s correct, it could clearly give the pound a lift.

Local developments

It is a quiet day for domestic data releases.

Following Eskom’s announcements of load-shedding earlier this month, they announced for a second time this year yesterday morning of the intention to implement stage one load-shedding; this involves cutting as much as 1,000 megawatts from the power grid . As the day progressed, Eskom implemented stage 2 load-shedding (cutting 2,000 megawatts) across the country due to “unforeseen technical problems” at some of their generating plants. As the grid becomes more unstable with peak demand expected to exceed supply, the utility has warned that we are likely to see load-shedding on a daily basis through to April this year. Eskom has indicated a “medium- to high chance” of load-shedding today.

Markets

The rand weakened on Monday, closing at USDZAR11.46, compared with Friday’s close of USDZAR11.41. The rand’s depreciation occurred despite dollar weakness against most of the major crosses; the dollar weakened most against the pound (-0.6%) and the euro (-0.3%), but strengthened against the yen (0.6%). The rand weakened against most of the major crosses, with depreciation seen against the pound (-1.1%), euro (-0.8%) and the dollar (-0.5%), although the rand strengthened against the yen (0.2%). The rand put in the worst performance amongst the commodity currencies we monitor and the second-worst performance amongst the EM currencies, only ahead of the RUB. The INR remained unchanged on the day on the back of the public holiday in India on Monday. The rand traded between a low of USDZAR11.4057 and a high of USDZAR11.4935 intraday.

Turnover was a healthy R26.5bn in nominal SAGBs and R518m in ILBs yesterday. 37% of turnover was due to the R186, 11% due to the R2030 and 10% from the R203. Offshore investors were net buyers of R834m in nominals, R28m in sovereign ILBs. Buying was heaviest in the R186 (+R929m),R2030 (+R740m), R203 (+R483m) and R214 (+R383m). This was offset by aggressive selling of R2023 (-R1.2bn), R213 (-R398m), R208 (-R226m) and R204 (-R193m).

The curve weakened and flattened yesterday, with the R204 through R186 moving 4.0 – 4.5 bps higher. The back-end R214, R2044 and R2048 actually strengthened on the day, but by 1.0 bp or less. FRAs followed the weaker ZAR and weaker currency, with FRAs ticking marginally higher.

S&P downgraded the ratings of the Russian Federation overnight. Long- and short-term foreign currency ratings were cut to BB+/B, from BBB-/A-3. Local currency ratings were cut to BBB-/A-3, from BBB/A-2. The sovereign rating was moved off creditwatch negative, but is still on a negative outlook. The downgrade was due to the rating agency’s view that monetary policy flexibility in the country was more limited and growth was likely to be lower. Russia debt has weakened by over 80 bps yesterday.

Yesterday was a weaker day in EM sovereign debt markets. 5 and 10yr local currency sovereign paper moved 13.0 and 7.5 bps weaker respectively. Excluding the weakness in the Russian debt, however, 5yr EM debt weakened and 10yr EM strengthened on average. Mexico and Hungary led the moves stronger, while South African debt underperformed the average ex-Russia.

Commodities were mixed on the day. Gold and platinum were down on the day, falling by 1.0% and 1.3% respectively. Copper increased on Monday, by 1.1%. Brent was down by 1.3% to close at $48.16/bbl. The developed market MSCI was up by 0.3% on Monday, while the MSCI EM was down by 0.2% on the day. The ALSI, however, increased by 1.0% on the day. Non-residents were net buyers of equities on Friday (ZAR1 246 million). Both the EMBI and SA’s 5yr CDS spread widened on Monday, by 3 bps and 4 bps respectively. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, decreased by 6.8% yesterday.

Latest SA publications

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

SA Fixed Income Weekly: SAGB forecasts for 2015 by Asher Lipson (23 January 2015)

Credit & Securitisation Weekly: Banks early out the starting block by Steffen Kriel and Varushka Singh (23 January 2015)

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)

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