Rand continues to make steady gains

The rand continues to trade stronger against the dollar, reaching as low as 11.7706 against the dollar yesterday.
Since Friday, much of the rand gains were mostly due to dollar weakness. Yesterday, the rand strengthened, while other EM currencies such as the TRY and BRL, as well as the EUR, traded largely sideways against the dollar.
Support for the USDZAR should come in at 11.7500 and 11.6700. Resistance is at 11.9600 and then 12.150.
We published our FX Weekly yesterday. We pin the mid-point of our anticipated USDZAR trading range at 12.10 for Q2:15. We maintain our bias towards rand weakness against the dollar into the approach of Fed “liftoff”, setting our mid-point forecast for Q3:15 at 12.35. In our opinion, bouts of rand strength below these mid-points (such as now) would offer an opportunity to add long dollar positions; we would not recommend going short dollar (long rand).
We also remain of the opinion that the rand is most vulnerable on the USD axis while, with the prospect of continued monetary accommodation from the ECB and BoJ, the rand’s vulnerability on the EUR and JPY axes is greatly reduced.
We stick with our view that the SARB will keep rates on hold this week. Developments since the January meeting have largely vindicated the Bank’s expressed reluctance to ease further. We think that the SARB will take the opportunity to step up its hawkish rhetoric at this meeting, which could offer some support to the rand.
On the commodity front, gold is edging back towards the $1,200 level as concerns over Greek debt, their ability honour upcoming loan repayments as well as pay wages the end of the month rises. For now, financial markets seem comfortable with the latest developments as risk-metrics such as the VIX index continue to trade near YTD lows. However, concerns may increase as we edge towards April. Should this happen, it may weigh on the rand.

International developments

Yesterday’s US CPI data showed that prices remained flat in y/y terms in February. Analysts had anticipated deflation to persist at the January level of -0.1% y/y. The core measure of consumer inflation, excluding food and energy, picked up slightly to 1.7% y/y in February from 1.6% y/y in January – this was in line with the consensus. However, Capital Economics notes that it is likely that base effects will see deflation re-emerge for most of H1:15.

A solid set of flash PMI numbers from the Eurozone has added to signs that the region’s economy is slowly recovering. Both the manufacturing and services components improved on the previous month’s readings and also turned out better than anticipated. The composite reading climbed to 54.1 in March from 53.3 in February. Analysts had expected a more moderate rise 53.6.

Today, the only data release on the international front worth noting is US durable goods orders. Extremely cold weather is expected to be a dampener on the numbers with a 0.2% m/m climb seen in the headline figure for February, compared to January’s 2.8% m/m increase. Durable goods orders excluding transportation is also seen rising 0.2% m/m. This is only slightly softer than January’s 0.3% m/m increase. Durable goods orders are, however, expected to pick up in March, on the back of orders postponed due to February’s poor weather conditions.

Local developments

Stats SA released the Quarterly Employment Statistics for Q4:14 yesterday. While there were no consensus forecasts available, we had anticipated that the q/q non-farm payrolls would rebound in the final quarter after contracting by 1.5% q/q in Q3:14. Surveying the past 10 years, the Q4 q/q number has improved in the final quarter in 7 of the past 10 years. In the event, non-farm payrolls increased by 0.5% q/q in Q4:14 from a revised -1.7% q/q in Q3:14 (previously -1.5% q/q). On a y/y basis, however, non-farm payrolls contracted by -0.2% in Q4:14 from 1.0% in Q3:14.

Markets

The rand strengthened by a further 10c on Tuesday, with the local currency closing at 11.80, compared to Monday’s close of 11.90. The rand’s appreciation against the greenback occurred despite dollar strength against all of the major currencies; the dollar posted the largest gains against the pound (-0.7%), the euro (-0.2%) and marginally against the yen. The rand gained ground against all of the major crosses; the pound (-1.6%), the euro (-1.1%) and the yen (0.9%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report and the third-best performance amongst the EM currencies, only behind the RUB and the HUF. The rand traded between a low of USDZAR11.7718 and a high of USDZAR11.9526 intraday.

Local bond market turnover yesterday was an auction-boosted R32.5bn in nominal SAGBs and R444m in ILBs. 26% of turnover was in the R186, 27% in the R203 and 19% in the three auction bonds. This may be the first time that stats have showed another bond, other than the R186, with the largest turnover contribution. Offshore investors were net buyers of R1.6bn on the day. There was consistent buying across the curve: R2048 (+R592m), R213 (+R486m), R186 (+R438m) and over R200m in the R208, R2023 and R2037. There was a significant -R1.2bn sold in the R203.

Tuesday saw a slightly surprising auction; all bonds cleared stronger than market trading levels, but bids were just R5,925m (2.52x bid/cover). This was the lowest volume bid, since the first auction of the year on 13 January, when R4,530m was bid. R2,240m was bid in the R213 and R900m issued (2.49x bid/cover), R1,855m was bid in the R2037 (2.47x) and R1,830m was bid in the R2048 (2.61x). The R213 cleared at 8.135%, 1.5 bps stronger than where it was trading in the market, the R2037 cleared at 8.325%, 1.0 bp stronger than its market trading level and the R2048 cleared at 8.34%, 2.0 bps stronger. There were only 117 bids, the lowest number since the auction on the 14 October 2014. 41 bids went to the R213, of which 31.7% were successful, 43 bids went to the R2037, of which 31.3% were successful and 33 bids went to the R2048, of which 30.9% were successful.

Bonds were 3.0 – 4.0 bps stronger yesterday. Front-end FRAs moved slightly higher, back-end FRAs moved slightly lower. US Treasuries however continued their march lower, with the 10yr a further 3.9 bps lower and now trading at 1.87%, almost 20 bps stronger over the past five days.

Metal prices were mixed on Tuesday. Copper and gold were up by 0.4% and 0.3% respectively while platinum was down by 0.8% on the day. The price of Brent decreased on Tuesday, by 1.5%, to close lower at $55.11/bbl. The developed world MSCI was down by 0.3% on Tuesday while the MSCI EM was up by 0.3% on the day. The ALSI was up by 0.4% on the day. Non-residents were net buyers of equities (ZAR1 685 million) on Tuesday. The EMBI spread narrowed by 1 bp and SA’s 5yr CDS widened by 3 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 1.6%.

Latest SA publications

SA FX Weekly: USDZAR trading now in a weaker range by Marc Ground and Shireen Darmalingam (24 March 2015)

SA Macroeconomics: Economics Note: The SARB to remain on hold: Manufacturing & mining contract in January; the Fed is no longer “patient”; and S&P downgrades Eskom to speculative grade by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

Credit & Securitisation Weekly: S&P downgrades Eskom by Steffen Kriel and Varushka Singh (20 March 2015)

SA FI Weekly: Little local driver to bonds by Asher Lipson (20 March 2015)

SA Macroeconomics: Economics Note: Jan retail sales slowed to 1.7% y/y from 2.0% y/y in December: General dealers -2.5% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA Macroeconomics: Economics Note: CPI falls to 3.9% y/y: Services and food remain sticky by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA Macroeconomics: Economics Note: CAD narrows to 5.1% of GDP: Trade data a positive surprise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA FX Weekly: Catching a falling knife by Marc Ground and Shireen Darmalingam (16 March 2015)

Credit & Securitisation Weekly: Eskom by Steffen Kriel and Varushka Singh (13 March 2015)

Credit & Securitisation Monthly: Update on Eskom by Steffen Kriel and Varushka Singh (6 March 2015)

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