SA CPI due out this week

• The rand weakened on Friday, closing at 12.07, compared to Thursday’s close of 11.96. The rand traded between a low of USDZAR11.8754 and a high of USDZAR12.0982 intraday.

• US CPI data was released on Friday. Headline CPI came in at 0.2% m/m, while CPI excluding food and energy came in at 0.2% m/m. The risk was to the downside and thus biased towards a bearish dollar position as we got closer to the release of the price data. On the news of the data, the dollar weakened.

• The PBoC reduced the reserve requirement ratio (RRR) for banks by 1 percentage point, to 18.5% over the weekend. With the slowdown in China, demand growth for commodities has also come under pressure affecting commodities such as iron ore, copper and platinum negatively in recent months. The rand remains a commodity currency, and weakness in China’s economy (and, by implication, commodity demand) should be negative for the rand.

• Local CPI data is due out this week. Bloomberg consensus expectations are for the headline print to have increased to 4.1% y/y in March, in line with Standard Bank’s forecasts, from 3.9% y/y in February. The m/m data is expected to have increased to 1.5% in March from 0.6% in February. The expected increases are on the back of the 96c/l hike in the petrol price.

• 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.

International developments

The PBoC has reduced the reserve requirement ratio (RRR) for banks by 1 percentage point, to 18.5% over the weekend. This comes after the general economic outlook deteriorated more than expected. On a quarter-on-quarter annualised basis, growth came in at 5.2% in Q1:15, down from 6.1% in Q4:14. With the slowdown in China, demand growth for commodities have also come under pressure, affecting commodities like iron ore, copper and platinum negatively in recent months. The rand remains a commodity currency and weakness in China’s economy (and by implication commodity demand) should be negative for the rand). Since the announcement of a cut in the RRR, commodity prices have had little reaction.

Our Asia economist Jeremy Stevens indicates that more support will be forthcoming and he expects the central bank will cut rates in coming months, and provide further targeted lending to priority sectors and continued injections of liquidity in H1:15. The PBoC cannot be behind the curve because it will cause liquidity and credit tightness to increase, putting further downward pressure on economic growth.

Following comments by policymakers at the G20 summit, and the communique released in its wake, Steve Barrow (our G10 FIC Strategist) notes that the focus now is less about making banks safe in the event of global financial stress and more about looking for weak-points in the non-bank financial sector. He believes that this is not entirely new but the momentum looks to be gaining pace. Many banks will probably be relieved that things like bailouts, stress tests, increased regulation, tougher capital controls and huge fines are slowly becoming a thing of the past. It’s hard to say if they are fully sanitized and impervious to whatever shocks the global economy and its financial markets can throw at them. But policymakers seem to think they have tightened the reins enough.

Of significance that came out of the communique, it is encouraging that should financial markets implode, for whatever reason, it is less likely that banks will fall over. However, Steve believes that there is no real focus on stopping the financial excesses in the first place; that there has been no focus on trying to rid the US Fed and the dollar of this hegemonic position which, in our view feeds global liquidity booms – and the busts. He notes that the fact that the markets are paranoid about tighter Fed policy now is testament to this unwelcome dominance that the US enjoys.

The US CPI data out on Friday expected headline inflation to show a 0.3% m/m rise and a 0.2% m/m increase outside of food and energy. Steve pointed out that in terms of core prices, there was a big skew to the low side with economists almost undecided between a 0.1% m/m increase and 0.2% m/m. For instance, some 40% of the 81 respondents in the Bloomberg survey see the chance of a 0.1% m/m print, while just 2.5% see the possibility of a number above 0.2% m/m. In the event, headline CPI came in at 0.2% m/m, while CPI excluding food and energy registered at 0.2% m/m. Steve agreed that the risk was to the downside and thus biased towards a bearish dollar position as we get closer to the release of the price data. On the news of the data, the dollar weakened, as anticipated.

Local developments

This week sees the release of the local CPI data for March. Stats SA releases the data on Wednesday at 10h00. Bloomberg consensus expectations are for the headline print to have increased to 4.1% y/y in March, in line with Standard Bank’s forecasts, from 3.9% y/y in February. The m/m data is expected to have increased to 1.5% in March from 0.6% in February. The expected increases are on the back of the 96c/l hike in the petrol price, which will have added 0.3ppts more to CPI in March than in February. Petrol prices went up an additional 156c/l this month, which will add 0.6ppts to April’s headline CPI print. In addition, food inflation is expected to have moderated in March, to below February’s 6.5% y/y, but is expected to remain 6.0% y/y. Food still poses the biggest risk to our forecast, as the historical relationship between meat and yellow maize has broken down.

Deputy Governor Daniel Mminele has over the weekend reiterated that the inflation outlook has deteriorated. In a speech made at a conference during the Annual IMF Spring Meeting in Washington, he indicated that monetary policy remained relatively accommodative in South Africa and that inflation risks remained skewed to the upside. He reiterated that there is reduced policy flexibility and that interest rates will have to normalise over time. We continue to believe that the SARB will stand still at the next meeting.

Brian Molefe has been appointed as acting Eskom CEO, temporarily replacing suspended Tshediso Matona. The Eskom board suspended four executives, including the CEO and CFO earlier in March. An investigation is currently underway, which is expected to last three months. We believe that the appointment of Brian Molefe will be positive for Eskom given his extensive experience in running and providing stability in Transnet.

Markets

The rand weakened on Friday, closing at 12.07, compared to Thursday’s close of 11.96. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted losses against the euro (0.4%), the pound (0.2%) and against the yen (-0.1%). The rand lost ground against all of the major crosses; the euro (1.3%), the pound (1.2%) and the yen (-0.9%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the NOK, and put in the third-worst performance amongst the EM currencies, ahead of the MXN and RUB. The rand traded between a low of USDZAR11.8754 and a high of USDZAR12.0982 intraday.

Commodity prices were mixed on Friday. Platinum and gold were both up by 0.9% and 0.5% respectively, while copper was unchanged. The price of Brent decreased on Friday, by 0.8%, to close lower at $63.45/bbl. Both the developed world MSCI and the MSCI EM were down on the day, by 1.0% and 0.9% respectively. The ALSI decreased by 1.0% on the day. Non-residents were net sellers (-ZAR1 621 million) of equities on Friday. The EMBI spread widened by 9 bps, while SA’s 5yr CDS widened by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 10.2%.

Latest SA publications

Credit & Securitisation Weekly: Escalating municipal electricity debt by Steffen Kriel (17 April 2015)

SA FX Weekly: ZAR: less undervalued and still vulnerable against the dollar by Marc Ground and Shireen Darmalingam (16 April 2015)

SA Macroeconomics: Feb retail sales 4.2% y/y, up from 1.9% y/y in Jan: General dealers grow 4.8% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (15 April 2015)

SA Macroeconomics: Risk on as global monetary policy remains accommodative: SA consumption expected to outpace production in February by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (13 April 2015)

Credit & Securitisation Monthly: Quarterly update: Q1 2015 by Steffen Kriel (10 April 2015)

SA FX Weekly: Dollar takes a breather by Marc Ground and Shireen Darmalingam (10 April 2015)

SA Macroeconomics: Economics Note: Trade balance & PSCE this week: Fitch on the sovereign; PPI declines; employment rises; & wage negotiations continue by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 March 2015)

SA Macroeconomics: Economics Note: Weaker growth, higher inflation, unchanged repo rate: Hawkish tone, but SARB's outlook still does not justify a hike by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 March 2015)

SA Fixed Income MPC Comment: Defending not to hike by Asher Lipson and Walter de Wet (26 March 2015)