A steady rand ahead of MPC

• The rand awaits the MPC meeting outcome today.

• We believe that the SARB will keep rates on hold – in line with market consensus.

• The statement should be hawkish, which may lend some support to the rand.

• From tomorrow, the market may start looking towards next week already.

• On the local front, we see the release of South Africa’s trade balance for February, which is due for release on Tuesday next week. January’s trade deficit was large at -Rbn24.22. We expect February’s trade balance to show a substantial improvement. On the international front we look at US non-farm payrolls for March. This will be released on Friday next week.

• The rand should be sensitive to both these data points with the trade balance affecting the current account and US employment affecting US monetary policy.

• It is another fairly light schedule on the international data front today. US jobless claims numbers are out today, which might be of some interest to market participants.

• Stats SA also releases the February PPI today at 11:30. Bloomberg consensus expectations has pencilled in a moderation in y/y PPI to 2.8% from 3.5% in January.

International developments

Yesterday’s US durables goods orders data showed an even bigger slump than analysts had anticipated. The headline figure fell by -1.4% m/m in February, after a downwardly revised increase of 2.0% m/m in January (previously 2.8% m/m). Analysts were expected a slowdown to an increase of 0.2% m/m. Excluding transportation (core), the data was slightly better but still below what was expected, falling -0.4% m/m (Bloomberg consensus: +0.2% m/m). For January, the core numbers was also revised down to show a -0.7% m/m fall (previously, +0.3% m/m).

Another fairly light schedule on the international data front today. There will be US jobless claims numbers, which might be of some interest to market participants. Initial claims are seen rising to 290k for the week ended 21 March, almost the same as the increase seen in the preceding week (290k). Continuing claims are seen edging slightly lower to 2,400k from 2,417k.

Local developments

Stats SA also releases the February PPI today at 11:30. Bloomberg consensus expectations has pencilled in a moderation in y/y PPI to 2.8% from 3.5% in January. On a m/m basis, however, we can expect PPI growth to have gathered momentum. M/m PPI is expected at 0.2% after posting -1.1% growth in January.

The SARB announces its rate decision today at 15:00. We maintain our view that the SARB will keep rates on hold at 5.75% today. This is in line with the unanimous prediction among those in the Bloomberg poll. Currently, the FRA market is pricing in a 25 bps hike within five months (or by the July/September MPC meeting). Just before the previous meeting, the FRA market was almost fully discounting around 25 bps worth of cuts (actually 22 bps) within four months (or, at that stage, by the May meeting).

The SARB’s rhetoric in both in its official statement after the January meeting, as well as in commentary since then, helped put paid to these market expectations for rate cuts. In January, while the Bank appeared less hawkish than previously, owing largely to interest rate friendly adjustments made to its inflation and growth forecasts, it tried to maintain a hawkish tone, saying that it was of the view that “the bar for further accommodation remains high”. It specifically mentioned “a sustained decline in the inflation rate and inflation expectations” as a precondition for further accommodation. Added to this, the Bank outlined a number of factors and arguments that appeared to be in defence of the decision not to cut.

The exchange rate remains an upside risk to the inflation outlook, vulnerable to changing perceptions of the timing of global monetary policy adjustments, and the slow pace of contraction in the current account deficit. A further upside risk to the inflation forecast comes from a possible increase in wage settlement rates in excess of inflation and productivity growth in the coming year. Food prices remain a major source of inflation pressure with increases still in excess of the headline inflation rates, while electricity constraints hold domestic growth at ransom. Given the Bank’s concerns about the current account and the vulnerability this lends the rand, which ultimately poses an upside risk to their inflation outlook, it is natural that the Bank would be cautious in moving in a way that could aggravate the situation.

Markets

The rand weakened on Wednesday, with the local currency closing at 11.85, compared to Tuesday’s close of 11.80. The rand’s depreciation against the greenback occurred despite dollar weakness against all of the major currencies; the dollar posted the largest losses against the euro (0.4%), pound (0.2%) and the yen (-0.2%). The rand also lost ground against all of the major crosses; the euro (0.8%), the pound (0.6%) and the yen (-0.6%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the NZD and put in the third-worst performance amongst the EM currencies, ahead of the TRY and BRL. The rand traded between a low of USDZAR11.7552 and a high of USDZAR11.8836 intraday.

Metal prices were mixed on Wednesday. Platinum and gold were up by 0.4% and 0.2% respectively while copper was down by 0.3% on the day. The price of Brent increased on Wednesday, by 2.5%, to close higher at $56.48/bbl. Both the developed world MSCI and the MSCI EM were down on Wednesday, by 0.9% and 0.2% respectively. The ALSI was down by 0.9% on the day. Non-residents were net buyers of equities (ZAR1 084 million) on Wednesday. The EMBI spread narrowed by 7 bps and SA’s 5yr CDS narrowed by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 13.4%.

Latest SA publications

SA FI ALBI note: Auctions pressure the ALBI by Asher Lipson (25 March 2015)

SA FX Weekly: USDZAR trading now in a weaker range by Marc Ground and Shireen Darmalingam (24 March 2015)

SA Macroeconomics: Economics Note: The SARB to remain on hold: Manufacturing & mining contract in January; the Fed is no longer “patient”; and S&P downgrades Eskom to speculative grade by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

Credit & Securitisation Weekly: S&P downgrades Eskom by Steffen Kriel and Varushka Singh (20 March 2015)

SA FI Weekly: Little local driver to bonds by Asher Lipson (20 March 2015)

SA Macroeconomics: Economics Note: Jan retail sales slowed to 1.7% y/y from 2.0% y/y in December: General dealers -2.5% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA Macroeconomics: Economics Note: CPI falls to 3.9% y/y: Services and food remain sticky by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA Macroeconomics: Economics Note: CAD narrows to 5.1% of GDP: Trade data a positive surprise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA FX Weekly: Catching a falling knife by Marc Ground and Shireen Darmalingam (16 March 2015)

Credit & Securitisation Weekly: Eskom by Steffen Kriel and Varushka Singh (13 March 2015)

Credit & Securitisation Monthly: Update on Eskom by Steffen Kriel and Varushka Singh (6 March 2015)