CPI centre stage

• The rand remains above 12.00, with markets little moved ahead of today’s domestic CPI data. The rand strengthened on Tuesday, closing at 12.12, compared to Monday’s close of 12.14. The rand’s appreciation against the greenback occurred despite dollar strength against some of the major currencies. The rand traded between a low of USDZAR12.0751 and a high of USDZAR12.1948 intraday.

• On the international front, Greece remains the focus point. We believe that it is it is hard to see any positive developments that will help Greece find the €1tr it owes international creditors next month.

• The National Bank of Hungary announced its decision on rates yesterday. After cutting the benchmark interest rate to 1.95% in March this year, the Bank decided on a further 15 bps worth of policy accommodation at yesterday’s meeting.

• The Turkish Central Bank meets today to decide on the future course of monetary policy. The lira’s weakness poses a problem for the Turkish Central Bank which is under mounting pressure, amid weak growth, to cut rates. The Bank has already cut rates by 50 bps on 20 January and by a further 25 bps at the 24 February meeting to 7.5%.

• Focus over the next few weeks is firmly placed on the UK elections, scheduled for 7 May. While bookmakers’ odds put Labour as most likely to govern, from a minority position with the tacit support of another, it is likely to be the Scottish National Party (SNP).

• Stats SA releases the March CPI data today 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 increase is expected on the back of an increase in petrol prices in March. Food still poses the biggest risk to our forecast.

International developments

The rand remains above 12.00, with markets little moved ahead of today’s domestic CPI data. On the international front, Greece remains the focus point. We believe that it is it is hard to see any positive developments that will help Greece find the €1tr it owes international creditors next month. This should keep risk appetite in international markets at bay. 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. With concerns over Greece’s financial situation and possible exit from the euro area, it is now believed that the end of June is the “main deadline: to unlock payments. Finance chiefs are expected to meet in Latvia on Friday. The meeting, however, will likely to be take stock of the negotiations thus far, rather than to review measures to ramp up the economy.

The National Bank of Hungary announced its decision on rates yesterday. After cutting the benchmark interest rate to 1.95% in March this year, the Bank decided on a further 15 bps worth of policy accommodation at yesterday’s meeting. As inflation remains low, we expect that further rate cuts on the cards through to mid-2015. The HUF has been one of the most vulnerable EM currencies to volatility in financial markets. The HUF has lost about 6.2% of its value since the start of the year. It is thus warranted that the central bank would want to protect it.

The Turkish Central Bank meets today to decide on the future course of monetary policy. The lira’s weakness poses a problem for the Turkish Central Bank which is under mounting pressure, amid weak growth, to cut rates. The Bank has already cut rates by 50 bps on 20 January and by a further 25 bps at the 24 February meeting to 7.5%. Another rate cut is, however, unlikely this month given the continued weakening of the currency. Still, another rate cut is likely before the general elections scheduled for June this year. Of concern, however, is the rapid rate at which the bank has cut rates (a total of 250 basis points since May 2014), which could undermine the central bank’s credibility and exert further downward pressure on the TRY.

Focus over the next few weeks are firmly placed on the UK elections, scheduled for 7 May. While bookmakers’ odds put Labour as most likely to govern, from a minority position with the tacit support of another it is likely to be the Scottish National Party (SNP). Our G10 Strategist, Steve Barrow, notes that to win the election the Conservatives need closer to 40% poll support (its currently around 34%) or for other potential coalition partners, like the Liberal Democrats, to be doing better. With the Conservatives seemingly stuck, in spite of the elevated rhetoric from the press, it is no wonder that betting odds have shifted in Labour’s favour.

Steve further notes that while there has been some angst concerning the Conservative pledge for a referendum on EU membership, he believes that that the market will judge the election outcome with its typical left-right bias. This means that a left-of-centre Labour minority government – with outside support from the SNP – will probably weigh on sterling.

Local developments

The ley print today is South Africa’s CPI. Stats SA releases the March CPI data today 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.

We believe that inflation has bottomed in February and from March onwards inflation will steadily rise to above 6% in Q1:16. Should today’s print come in higher than expected, we would expect the rates market to price in further hikes this year more aggressively. We would also look for the rand to come under some initial pressure even though the from an interest rate differential perspective the rand may find strength after markets settled.

Markets

The rand strengthened on Tuesday, closing at 12.12, compared to Monday’s close of 12.14. The rand’s appreciation against the greenback occurred despite dollar strength against some of the major currencies; the dollar posted the largest gain against the yen (0.4%) and marginally against the euro, but weakened against the pound (0.1%). The rand also gained ground against all of the major crosses; the yen (0.6%) and against the euro and the pound (-0.1%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, but put in a mixed performance amongst EM currencies. The rand traded between a low of USDZAR12.0751 and a high of USDZAR12.1948 intraday.

Metal prices were mixed on Tuesday. Gold was up by 0.5% while platinum was up only marginally. Copper prices fell by 0.6% on the Tuesday. The price of Brent closed lower at $62.08/bbl. Both the developed world MSCI and the MSCI EM was up on the day, by 0.2% and 0.8% respectively. The ALSI was up by 0.5% on the day. Non-residents were net buyers of equities (ZAR505 million) on Tuesday. The EMBI spread narrowed by 6 bps and SA’s 5yr CDS narrowed by 3 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 0.4.

Latest SA publications

SA Macroeconomics: March CPI to rise to 4.1% y/y: EM assets receive mixed signals from US & Chinese data by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 April 2015)

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)