ZAR weaker, and yields driven by ECB QE

• The rand weakened further on Monday, closing at 12.14, compared to Friday’s close of 12.06. The rand’s depreciation against the greenback occurred in line with dollar strength against all of the major currencies. The rand traded between a low of USDZAR11.98930 and a high of USDZAR12.1543 intraday.

• The rand remains a commodity currency, and weakness in China’s economy (and, by implication, commodity demand) should be negative for the rand. 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.

• The focus remains on Europe not only because Greece is scrambling to find funds to pay creditors and salaries but also because of the ECB QE which is in full swing. With the Fed still some time away from rate hikes (we pencil in a hike in September), it looks as if the near-term path for US – and global – yields will be driven by the ECB’s quantitative easing and the impact that this is having on yields in the euro region.

• Former ECB President, Jean-Claude Trichet, commented earlier today with reference to the Greek reform efforts, that while much has already been done, confidence among households, entrepreneurs and international sentiment is still lacking. It is it is hard to see any positive developments that will help Greece find the €1tr it owes international creditors next month.

• We believe that concerns over Greece’s financial situation and possible exit from the euro would keep EM bulls at bay. We expect the rand especially to remain on the back foot.

International developments

The rand remains on the back foot, with the currency failing to break below 12.00 against the dollar. Although the US 10-year government bond yield remains largely unchanged around the 1.90% level, domestic bond yields are on the back foot. The FRA market has moved higher too and is now starting to price 50 bps rate hikes this year vs. 25 bps last week. The move in the FRAs seems to be driven largely by higher oil prices (with Brent now at $63.50) and a rand which has failed to appreciate in recent days.

As pointed out yesterday, China eased monetary policy over the weekend as the PBoC reduced the reserve requirement ratio (RRR) for banks by 1 percentage point, to 18.5% over the weekend. This should release liquidity from the banking system which was previously unavailable for loans. That said, overall the market seems unimpressed with the developments, with commodities hardly reacting. We have been watching copper closely given that the metal has such a large exposure to Chinese demand. Copper has barely reacted and is in fact marginally lower, trading at $6,050 this morning. The rand remains a commodity currency, and weakness in China’s economy (and, by implication, commodity demand) should be negative for the rand. 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.

The focus remains on Europe not only because Greece is scrambling to find funds to pay creditors and salaries but also because of the ECB QE which is in full swing. With the Fed still some time away from rate hikes (we pencil in a hike in September) it looks as if the near-term path for US – and global – yields will be driven by the ECB’s quantitative easing and the impact that this is having on yields in the euro region. The ECB’s EUR1tr-plus quantitative easing plan is clearly having a significant impact on yields and, in our view, is helping to drag non-euro yields down as well. Steve believes that if the situation persists, 10-year German yields should reach his (prior) zero target very soon. Yields are already negative out to 9-years. Last week’s ECB press conference saw President Draghi insist that the Bank will stay the course with QE in spite of the fact that yields have tumbled and economic data from the euro zone is looking a little healthier.

Former ECB President, Jean-Claude Trichet, commented earlier today with reference to the Greek reform efforts, that while much has already been done, confidence among households, entrepreneurs and international sentiment is still lacking. He iterated that an urgent program is needed that would inspire the necessary confidence in Greece. Our G10 strategist believes that it is it is hard to see any positive developments that will help Greece find the EUR1tr it owes international creditors next month. Progress on reform is too slow and even if the Greek government folds under the pressure it may put any deal to a referendum, which is bound to create angst in the markets. He sees the euro/dollar trading in a 1.05-1.10 range right now; it is the downside that’s at most risk as we see the euro falling to parity before the Fed starts to lift rates.

As far as the rand is concerned ECB QE should be beneficial for the rand, especially to the euro. However we believe that concerns over Greece’s financial situation and possible exit from the euro could keep EM bulls at bay. Given that South Africa needs foreign inflows to fund its current account, we expect the rand especially to remain on the back foot.

Markets

The rand weakened further on Monday, closing at 12.14, compared to Friday’s close of 12.06. The rand’s depreciation against the greenback occurred in line with dollar strength against all of the major currencies; the dollar posted the largest gains against the euro (-0.6%), the pound (-0.4%) and the yen (0.2%). The rand also lost ground against some of the major crosses; the pound (0.2%) and the yen (-0.4%), but gained marginally against the euro. The rand put in a mixed performance amongst both the commodity currencies we monitor for purposes of this report as well as EM currencies. The rand traded between a low of USDZAR11.98930 and a high of USDZAR12.1543 intraday.

Metal prices were lower on Monday. Platinum and copper were down by 1.9% and 1.4% respectively, while gold was down by 0.7% on the day. The price of Brent closed lower at $63.45/bbl. The developed world MSCI was up by 0.6% on Monday while the MSCI EM was down on the day, by 0.9%. The ALSI was up by 0.3% on the day. The EMBI spread narrowed by 4 bps and SA’s 5yr CDS widened marginally. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 4.3%.

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