• Friday afternoon saw the rand strengthen from 12.75 to as low as 12.60 in an hour as firstly the South African trade balance came in stronger than expected and then US data disappointed shortly thereafter. However, the rand has since weakened to the 12.68 level.

  • The rand traded between a low of USDZAR12.5826 and a high of USDZAR12.7715. Support for the USDZAR is at 12.58 and 12.5250. Resistance is at 12.7000 and 12.8000.

  • The quarterly US Bureau of Labour Statistics Employment Cost Index showed that during Q2:15 employment costs rose by 0.2% q/q SA, compared to expectations of 0.6% and a rise of 0.7% q/q in Q1:15. The slow pace in employment costs calls into question the pace at which wage pressures in the US economy is rising and as a result when the Fed may increase the Fed funds rate.

  • It’s a busy week on the domestic front. The Naamsa vehicle sales data for July is due for release later today. Bloomberg consensus expectations are for vehicle sales to have contracted further in July, to -5.3% y/y from -4.8% y/y in June.

  • The BER will release the July PMI data today at 11h00. Expectations are for the PMI to have slipped in July, albeit remaining above the 50-benchmark line. Bloomberg consensus is pencilling in 51.0 pts in July from 51.4 pts in June. On Wednesday the Standard Bank South Africa PMI for July will be released; expectations are for the index to have moved in tandem with the BER’s PMI.

  • SARS released the June trade balance on Friday last week. The trade numbers overshot expectations, with the trade balance recording the second consecutive trade surplus, at ZAR5.8 billion in June, from a downwardly revised ZAR4.9 billion in May. The trade balance in Q2:15 also recorded a ZAR37 billion surplus after three consecutive years of deficits.


International developments

Friday afternoon saw the rand strengthen from the 12.75 level to as low as 12.60 in an hour as firstly the South African trade balance came in stronger than expected and then US data disappointed shortly thereafter. However, the rand has weakened to the 12.68 level since then.

The quarterly US Bureau of Labour Statistics Employment Cost Index showed that during Q2:15 employment costs rose by 0.2% q/q SA, compared to expectations of 0.6% and a rise of 0.7% q/q in Q1:15. The slow pace in employment costs calls into question the pace at which wage pressures in the US economy is rising and as a result when the Fed may increase the Fed funds rate. USTs rallied on the back of this data, with the 10-year bond yield falling from 2.26% to 2.18%. Local bond yields in South Africa reacted little to this, possibly given the data-heavy week that lies ahead.

More information about inflationary pressures in the US will be evident in the Personal Consumption Expenditure (PCE) deflator today. The PCE deflator is a broad measure of price pressures in the US economy (broader than CPI) which the Fed would also track closely. Bloomberg expectations are for a print of 0.2% y/y in June, unchanged from the 0.2% print seen in May. Should the print see a decline, we would expect some rand strength against the USD. That said, any rand strength may be temporary as the market awaits the monthly non-farm payrolls data out of the US on Friday.

There will also be the Manufacturing PMI indices for all the major economies this week. Already this morning we saw China’s manufacturing PMI come out below expectations. The official PMI came in at 50.0 for July, marginally below the 50.1 expected according to Bloomberg. The Caixin manufacturing PMI, which focuses on smaller business and exporters, has declined further to 47.8, down from 48.2 in June. Both indices painted the same picture — manufacturing activity in China is clearly still struggling, which would also be broadly consistent with the decline in commodity prices in recent weeks. This also confirms that the cyclical underpin of the rand remains far from reliable.

Equities in Asia are struggling this morning on the back of the negative manufacturing news out of China. Most notable is that the Shanghai Composite continues to slide, trading 2.6% lower this morning. China’s equity market remains a source of concern in the broader markets and may add to further rand weakness. Worth noting is that the Athens Stock Exchange is set to reopen after a 5-week close.

Support for the USDZAR is at 12.58 and 12.5250. Resistance is at 12.7000 and 12.8000.


Local developments

It’s a busy week on the domestic front. The Naamsa vehicle sales data for July is due for release later today. Bloomberg consensus expectations are for vehicle sales to have contracted further in July, to -5.3% y/y from -4.8% y/y in June.

The BER releases the July PMI data today at 11:00. Expectations are for the PMI to have slipped in July, albeit remaining above the 50-benchmark line. Bloomberg consensus is pencilling in 51.0 pts in July from 51.4 pts in June. On Wednesday the Standard Bank South Africa PMI for July will be released; expectations are for the index to have moved in tandem with the BER’s PMI.

On Friday the SARB will release the gross gold and foreign exchange reserves for July. Bloomberg consensus is pencilling a slight decline in gross reserves to $46.37 billion from $46.83 billion, while net reserves are expected to have slipped to $41.2 billion in July from $41.59 billion in June.

SARS released the June trade balance on Friday last week. The trade numbers overshot expectations, with the trade balance recording the second consecutive trade surplus at ZAR5.8 billion in June from a downwardly revised ZAR4.9 billion in May. The trade balance in Q2:15 also recorded a ZAR37 billion surplus after three consecutive years of deficits. Our SBGS Economist, Kim Silberman, notes that this transition into surplus is a product of 1) lower oil prices, which shaved ZAR20 billion off last year’s ZAR81 billion deficit. We expect oil will reduce the import bill by about ZAR20 billion y/y in Q3:15 and ZAR14 billion y/y in Q4:15. 2) Lower non-oil import volumes due to weaker domestic demand. 3) Exports of minerals (i.e. coal and iron ore), which were up ZAR17.7 billion y/y; precious metals, which were up ZAR28 billion y/y, base metals up ZAR11 billion y/y and vehicle exports up ZAR21 billion y/y. She notes that these dramatic improvements year-on-year were despite significant falls in the prices of the commodities exported and are due to base effects, as strikes affected export volumes in the first eight months of 2014. In addition, the SA Mercedes Benz factory was closed in 2014 to undergo an upgrade.

The gold sector’s wage talks are in limbo as SA’s Association of Mineworkers and Construction Union (AMCU) rejected a pay offer made by the gold companies. The gold companies, however, are adamant that unless all four unions agree to a wage deal by the end of this week as well as the same terms at all the mines, the deal will be called off. Gold companies are looking for a “tidier settlement” and to avoid union-by-union deals. AMCU is demanding R12,500 a month for basic pay, The National Union of Mineworkers (NUM) lowered its demand to R9,500. Solidarity and UASA are expected to respond to the wage deal this week.


Markets

The rand strengthened, albeit mildly, on Friday, closing at 12.68, compared to Thursday’s close of 12.69. The rand’s appreciation against the greenback occurred in line with dollar weakness against most of the major currencies; the dollar posted losses against the euro (0.5%), the yen (-0.2%) and the pound (0.2%). The rand lost ground against some of the major crosses; the euro (0.3%) and the yen (-0.1%) but gained ground marginally against the pound. The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, and put in a mixed performance amongst the EM currencies. The rand traded between a low of USDZAR12.5826 and a high of USDZAR12.7715.

Commodity prices were mixed on Friday. Platinum and copper were both down on Friday, by 0.6% while gold was up by 0.7% on the day. Brent closed the day 2.1% lower, at $52.21/bbl. Both the developed world MSCI and the MSCI EM were up on Friday, by 0.3% and 0.8% respectively. The ALSI was up by 0.5% on the day. Non-residents were net buyers (ZAR2.912 billion) of equities on Friday. The EMBI spread narrowed on Friday, and SA’s 5yr CDS widened by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.5%.


Latest SA publications

SA FIC Weekly: Fool me once – despite oil price decline, bonds and rand on back foot as Brazil goes negative by Walter de Wet, Shireen Darmalingam and Penny Driver (3 August 2015)

SA Macroeconomics: SA records its first quarterly trade surplus in 3 years: Base effects, & weak demand counter declining terms of trade by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (31 July 2015)

SA Macroeconomics: June PPI rises to 3.7% from 3.6%: Petrol deflation slows, electricity tariffs kick in & food is up by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 July 2015)

SA Macroeconomics: Q2 unemployment falls to 25%: 563,000 jobs were created Y/Y, & 198,000 Q/Q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 July 2015)

SA Macroeconomics: June PSCE 8.14% y/y: HH unsecured credit accelerates, corporate credit slows to 12.9% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (29 July 2015)

SA Macroeconomics: EM portfolio flows: Portfolio flows in H1:15 are down 32% on H1:14 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (28 July 2015)

SA Macroeconomics: SA trade surplus expected: $0.3Bn net outflows from EMs: SA saw net debt & equity inflows by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 July 2015)

SA FIC Weekly: Despite the oil price decline, the cyclical underpin for the rand is still far from reliable by Walter de Wet and Shireen Darmalingam (27 July 2015)

SA FIC: The SARB: still hawkish, but more dovish by Walter de Wet (23 July 2015)

SA Macroeconomics: SARB hikes repo 25bps to 6.0%: Statement supportive of our view for rates on hold until 2H:2016 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 July 2015)

SA FIC Trade Idea: Time to revisit the receiver trade by Walter de Wet (23 July 2015)

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