• The rand is almost unchanged after a quiet day yesterday, with London on Bank holiday.

  • Ahead of Friday’s US NFP data, we expect range-bound trading.

  • We look for strong support for the USDZAR on approach of its 100-day MA at 11.7929.

  • In line with our strategic view of rand weakness, we would approach the USDZAR from the short side ahead of Friday’s NFP data.

  • On the monetary policy front, the RBA cut its benchmark interest rate today to a record low 2% (from 2.25%).

  • Greece continues negotiations with the ECB and IMF regarding its bail-out fund, but with mixed messages so far.

  • 10-year USTs continue to sell off, with the yield now at 2.14%, up from 1.90% a week ago.

  • The higher US yields continue to put pressure on local bond yields.

  • FRAs are pricing in 50 bps of hikes this year.

  • Brent crude oil has moved above USD66/bbl and is now at levels last seen in December 2014.


International developments

Yesterday was a quiet day on the international front. That said, there are two events dominating markets — US employment data, and Greece.

For the rand, the main focus for this week is the US non-farm payrolls due on Friday. Ahead of these numbers, we would expect rand rallies to be short-lived as the market is likely to be nervous. Recall that the March employment numbers came in well short of market expectations, which left the market second-guessing the sustainability of the US economic recovery. The USD is slowly gaining some ground against the euro again after being on the back foot since mid-April. The euro has strengthened from 1.0530 against the dollar to 1.1250 at the start of this week.

Unemployment data is important for the path that US monetary policy will follow. On the back of US rate hike expectations,10-year USTs continued to sell off yesterday, with the yield now at 2.14%, up from 1.90% a week ago. The higher US yields continue to put pressure on local bond yields.

We still hold the view that the Fed is likely to hike in September. We continue to believe that the normalisation path of the Fed should keep the dollar on the front foot and put some upward pressure on the 10-year UST yield. Bloomberg consensus is for 10-year UST yield at 2.30% in Q3:15, while Standard Bank Research forecasts the 10-year UST yield at 2.50% during the same period.

We believe that ahead of the rate hike, we may see periods were the dollar merely rests before it moves higher again in anticipation of the start to policy normalisation. At the same time, we expect the rand to remain on the back foot against the dollar in the run-up to September – especially in light of a current account deficit that remains wide and South Africa still needing portfolio flows to fund the CAD.

The market has also turned its attention back to Greece which is in a race against time to negotiate with European lenders, including the ECB, to maintain access to a USD172bn bailout fund.

Greece needs to secure at least USD7.2bn of this bail-out money by month-end to be able to meet existing obligations, including debt repayments and pension payments. As we head towards the end of this week, tension and uncertainty look set to rise. While the market seems fairly relaxed around the outcome of the negotiations, it is hard to see the rand strengthening amid these financial conditions.


Local developments

It will likely be quiet today. The April SACCI business confidence index is scheduled for release today at 11h30. The index has been below the 100 pt mark since July 2011 and has been oscillating around the 90 pt mark for the past 15 months.

We expect the index to continue along this trend over the coming months, in line with the subdued BER business confidence indicator. We expect very little change in the April index from the 89.1 pts recorded in March.


Markets

The rand strengthened on Monday, albeit marginally, closing at 12.05, compared to Friday’s close of 12.06. The rand’s appreciation against the greenback occurred despite dollar strength against most of the major currencies; the dollar posted the largest gains against the euro (-0.5%) and the pound (-0.2%), but weakened marginally against the yen. The rand also gained ground against most of the major crosses; the euro (-0.5%) and against the pound (-0.1%), but weakened marginally against the yen. 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 USDZAR12.0165 and a high of USDZAR12.0788 intraday.

Metal prices were up on Monday. Platinum and copper were up by 1.4% and 1.0% respectively, while gold was up by 0.8% on the day. The price of Brent closed marginally lower at $66.45/bbl. Both the developed world MSCI and the MSCI EM were up on the day, by 0.2%. The ALSI was up by 0.3% on Monday. Non-residents were net sellers of equities (-ZAR404 million) on the day. The EMBI spread narrowed by 3 bps and SA’s 5yr CDS narrowed marginally. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 1.2%.


Latest SA publications

SA Macroeconomics: SA’s trade deficit to narrow: Global data continues to drive local and EM assets by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 April 2015)

Credit & Securitisation Weekly: Eskom’s acting CEO comments by Steffen Kriel (24 April 2015)

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)

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