ZAR still on back foot

• The rand is on the back foot – again. The currency traded in a steady range around 12.10 for most of the morning, but depreciated sharply from around 12.08 to 12.24 in late afternoon trading.

• This morning saw the release of China’s Flash PMI data. The number came in at 49.2 pts – down from 49.6 pts in March. China’s manufacturing sector has been struggling so far this year, with the PMI signalling contraction in April. Although we would expect the monetary stimulus in China that which we saw earlier this week to start benefiting manufacturing in coming months, we are sceptical about the overall recovery of China’s manufacturing sector.

• As euro finance chiefs ready themselves for a gathering in Latvia on Friday, The ECB’s Governing Council increased its cap on Emergency Liquidity Assistance (ELA) by €1.5 billion to €75.5 billion yesterday. On news of the increase in the ELA, Greek bank shares rallied.

• The Turkish Central Bank kept its benchmark interest rate unchanged at 7.5% at yesterday’s meeting, as expected. This saw the lira sliding further, while 10-year government bonds climbed, narrowing the spread with 2-year yields just short of a full percentage point.

• Next week’s FOMC meeting (29 April 2015) will garner much attention. However, there will be no press conference or an update on forecasts available to provide any hints on forthcoming policy normalisation.

• Stats SA release of the March CPI data out yesterday confirmed that we may have reached the bottom of the cycle. Headline CPI increased to 4.0% y/y. The increase was largely due to a 96c/l hike in the petrol price. We still believe that interest rates are likely to remain unchanged at 5.75% in 2015.

International developments

The rand is on the back foot – again. The currency traded in a steady range around 12.10 for most of the morning, but depreciated sharply from around 12.08 to 12.24 in late afternoon trading. It appears the rand weakness – or dollar strength – was induced by the much better than expected US existing homes sales data for March. The data, released yesterday indicated existing home sales reregistered 5.19m in March, up from 4.88m in February and higher than the expected 5.03m. The existing home sales number is the highest since September 2013 and would broadly be consistent with a US labour market that continues to recover. We still expect the Fed to hike rates in September.

We note that overall risk appetite seems healthy if one takes into account the problems faced by Greece and the Eurozone. Equities in the US ended stronger yesterday – with the S&P closing up 0.5%. This was also the case in Japan and China, as well as in South Africa, with the JSE All Share ending up 140pts. The VIX index – a gauge of market fear especially in the US – is also near the lows seen this year. This does make us concerned that the rand could move even weaker should risk aversion increase.

This morning saw the release of China’s Flash PMI data. The number came in at 49.2 pts – down from 49.6 pts in March. China’s manufacturing sector has been struggling so far this year, with the PMI signalling contraction in April. Although we would expect the monetary stimulus in China that which we saw earlier this week (the PBoC cut the reserve ratio requirement for banks) to start benefiting manufacturing in coming months, we are sceptical about the overall recovery of China’s manufacturing sector. We have seen earlier this month export data disappoint by quite a margin which to some extent is a signal of weak external demand for China’s manufactured product. Monetary stimulus within China is unlikely to boost foreign demand.

As euro finance chiefs ready themselves for a gathering in Latvia on Friday, the ECB’s Governing Council increased its cap on Emergency Liquidity Assistance (ELA) by €1.5 billion to €75.5 billion yesterday. On news of the increase in the ELA, Greek bank shares rallied. Lenders now have a buffer of around €2.9 billion in cash after the ELA was increased. These liquidity buffers are usually maintained at around €3 billion, which gives the ECB and the Bank of Greece ample time to react in emergency situations. The meetings that commence on Friday will likely take stock of the negotiations thus far, rather than to review measures to ramp up the economy. But will also seek to encourage Greece to commit to economic reforms before funds run dry.

As expected, the Turkish Central Bank kept its benchmark interest rate unchanged at 7.5% at yesterday’s meeting. On news of the announcement, the lira slid further, while 10-year government bonds climbed and narrowing the spread, with 2-year yields just short of a full percentage point. The overnight lending rate was kept unchanged at 10.75% while the overnight borrowing rate remained at 7.25%. 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. The TRY is currently about 14% weaker to the USD since the start of the year.

Next week’s FOMC meeting (29 April 2015) will garner much attention. However, there will be no press conference or an update on forecasts available to provide any hints on forthcoming policy normalisation. Nonetheless, the markets will keep an eye out for comments on wage inflation as well as a signs of an improvement in the labour market. March’s payrolls data was worse-than-expected coming in at 126,000 from 264,000 in February. Despite this disappointing number, signs of labour market improvement are still evident, with employment indices in a number of surveys indicative of a labour market that is in good shape. Nonetheless, the Fed has reiterated on numerous occasions that the timing of the rate hike will depend on, amongst other things, further improvement in the labour market. We stick to our view and still pin the first rate hike in September 2015.

Local developments

Stats SA release of the March CPI data out yesterday confirmed that we may have reached the bottom of the cycle. Bloomberg consensus expectations were 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 was expected to have increased to 1.5% in March from 0.6% in February. In the event, headline CPI increased to 4.0% y/y. Our SBGS economist, Kim Silberman, attributes the deviation from expectation to food inflation, which slowed from 6.5% y/y in February to 5.9% y/y, versus our expectation of 6.1% y/y. As expected, however, the increase in the March number was largely due to a 96c/l hike in the petrol price, which added 0.3ppts more to headline CPI than it did in February. Petrol rose a further 156c/l this month, which will add 0.6ppts to April’s headline CPI print.

Core inflation, i.e. headline CPI less food and energy, slowed to 5.7% y/yin March from 5.8% y/y in February. Kim notes that although, in total, food inflation slowed, there was a deviation between processed food, which slowed from 6.7% y/y in February to 5.2% y/y in March and non-processed food, which accelerated from 6.4% y/y in February to 6.6% y/y in March. She points out that processed food inflation is less volatile, and thus expects the continued decline in agricultural food inflation over the next few months to anchor processed food inflation. Standard Bank expects food inflation, which poses the biggest risk to our forecast, to fall to a low of 4.1% y/y in December, before accelerating once again in 2016. CPI is expected to average 4.5% in 2015 and to increase to 6.1% yin 2016.

We believe that interest rates will stay flat at 5.75% in 2015.

Markets

The rand weakened on Wednesday, closing at 12.22, compared to Tuesday’s close of 12.12. The rand’s depreciation against the greenback occurred in line with dollar strength against most of the major currencies; the dollar posted the largest gains against the yen (0.2%) and the euro (-0.1%), but weakened against the pound (0.7%). The rand also lost ground against all of the major crosses; the pound (1.6%) and against the euro (0.6%) and the yen (-0.6%). The rand put in the worst performance amongst the commodity currencies we monitor for purposes of this report, and put in the second-worst performance amongst EM currencies, only ahead of the TRY. The rand traded between a low of USDZAR12.0709 and a high of USDZAR12.2467 intraday.

Metal prices were down on Wednesday. Platinum was up by 1.7% while gold was down by 1.3% on the day. Copper prices fell by 0.6% on the Wednesday. The price of Brent closed higher at $62.73/bbl. Both the developed world MSCI and the MSCI EM was up on the day, by 0.3% and 0.5% respectively. The ALSI was up by 0.3% on the day. Non-residents were net sellers of equities (-ZAR532 million) on Wednesday. The EMBI spread narrowed by 10 bps and SA’s 5yr CDS narrowed by 2 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 4.1%.

Latest SA publications

SA Macroeconomics: CPI surprises to the downside: Food inflation slowed to 5.9% y/y, and core to 5.7% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 April 2015)

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)