Rand firmer, but likely not for long, ahead of Fed hike

The rand is stronger and bonds yields are marginally lower after the FOMC meeting. The FRA market is still pricing in a 50 bps hike by year-end. However, we believe that USDZAR strength will be temporary ahead of a hike.
Yet again, Greece talks deadlocked yesterday. Although there is time for Greece and creditors to reach a deal, it seems that both parties refuse to budge. Creditors are calling on Greece to come up with credible proposals, while Greece calls creditors’ proposals “unfeasible”. We expect the rand to weaken should the situation in Greece deteriorate.
Data wise, it is quiet on the international and domestic scene today. We expect markets to be range-bound ahead of next week when key data such as US PCE will be released.
The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, behind only the AUD, and put in the third-best performance amongst the EM currencies, behind only the INR and RUB.
The rand traded between a low of USDZAR12.1400 and a high of USDZAR12.3083.
Key support for the USDZAR is at 12.3000/12.2800, 12.2000, 12.0500 and 11.8500. Resistance is at 12.5000, 12.6500, 12.8000/12.8500 and 13.0000.

International developments

The rand is stronger and bonds yields are marginally lower after the FOMC meeting. The FRA market is still pricing a 50 bps hike by year-end. We expect a 25 bps repo rate hike in Q3:15 – most likely in July.

The rand pulled back to around the 12.20 level on the back of a US Fed which indicated that rate hikes are likely to be shallower than what they indicated before. We continue to believe USDZAR strength will be temporary ahead of a Fed hike which we are penciling in for September. In line with our rand view, we would use sharp pull-backs in the USDZAR to add short rand positions. With the Greece debt negotiations still ongoing, we would expect countries with large current account deficits, such as South Africa, to experience currency weakness in bouts of risk aversion. Key support for the USDZAR is at: 12.2000, and 12.0500. Resistance is at 12.28, 12.5000 and,12.650.

Yet again, has Greece talks deadlocked yesterday. Parties on both sides seem unable to reach a deal. Although there remains time for Greece and creditors to reach some deal, it does appear as if both parties refuse to budge at this stage. Creditors are calling on Greece to come up with credible proposals while Greece calls creditors; proposals “unfeasible”.

Our view remains that we would expect pressure on the rand to depreciate if the situation in Greece deteriorates. Perhaps more significant may be that we will see the release of South Africa’s current account deficit for Q1:15 next week. Uncertainty around Greece may also rise sharply next week ahead of bond redemptions early in August. If South Africa’s current account deficit doesn’t show compression from the -5.1% in Q4:14, we would expect the rand to weaken.

Data wise today, it is quiet on the international and domestic scene. We expect markets to be range-bound ahead of next week when key data such as US PCE will be released.

Markets

The rand strengthened on Thursday, closing at 12.25, compared to Wednesday’s close of 12.26. The rand’s appreciation against the greenback occurred in line with dollar weakness against all of the major currencies; the dollar posted losses against the yen (-0.4%), the pound (0.3%) and the euro (0.2%). The rand lost ground against all the major crosses; the yen (-0.2%), the pound (0.1%) and marginally against the euro. The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, behind only the AUD and put in the third-best performance amongst the EM curremcies, behind only the INR and RUB. The rand traded between a low of USDZAR12.1400 and a high of USDZAR12.3083.

Commodity prices were up on Thursday. Gold and copper were up on Thursday, by 1.4% and 0.2% respectively. Platinum was up by 0.1% on the day. The price of Brent closed 0.6% higher, at $64.26/bbl. The developed world MSCI was up by 1.1% on Thursday, while the MSCI EM was up by 0.9% on the day. The ALSI was up by 0.6% on the day. Non-residents were net sellers of equities (-ZAR3.723 billion) on Thursday. The EMBI spread narrowed by 14 bps on Wednesday, while SA’s 5yr CDS narrowed by 6 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 9.0%.

Latest SA publications

SA Macroeconomics: Retail sales surprises to the upside at 3.4% y/y in April: YTD retail outperforms 2014 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

Credit & Securitisation Flash note: African Bank Ltd by Steffen Kriel (17 June 2015)

SA Macroeconomics: CPI rises to 4.6%, core to 5.7%: We adjust our CPI trajectory for 2016, which now breaches the target in Q1 and Q3 by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

SA FIC Weekly: SA FIC: The CAD: a growing concern - rand is now more sensitive to the CA than in over a decade by Walter de Wet and Shireen Darmalingam (17 June 2015)

SA Macroeconomics: The FOMC should provide this week’s dose of volatility: We expect SA's CPI rose in May, while retail sales slowed in April by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (17 June 2015)

Credit & Securitisation Weekly: One down, one to go by Steffen Kriel and Varushka Singh (12 June 2015)

SA Macroeconomics: Broad based contraction in April manufacturing, -2.0%y/y: Only vehicles growth was positive by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 June 2015)

SA Macroeconomics: Mining production grows 7.7%: PGMs up 82% y/y due to base effects, Gold -9.1%y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 June 2015)

SA Macroeconomics: US Payrolls data dominates EM: SA Manufacturing to contract, mining to benefit from base effects by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (8 June 2015)

Credit & Securitisation Monthly: Rating agencies weigh in on SA by Steffen Kriel and Varushka Singh (5 June 2015)

SA Macroeconomics: We revise our repo rate outlook : As inflation risks mount, the SARB has shifted to forward guidance, & away from data dependence by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (3 June 2015)

Share: Analysis feed

Certification

The analyst(s) who prepared this research report (denoted by an asterisk*) hereby certifies(y) that: (i) all of the views and opinions expressed in this research report accurately reflect the research analyst's(s') personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst’s(s’) compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research report.

Conflict of Interest

It is the policy of The Standard Bank Group Limited and its worldwide affiliates and subsidiaries (together the “Standard Bank Group”) that research analysts may not be involved in activities in a way that suggests that he or she is representing the interests of any member of the Standard Bank Group or its clients if this is reasonably likely to appear to be inconsistent with providing independent investment research. In addition research analysts’ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts cannot be subject to the supervision or control of anyone in the Standard Bank Group’s investment banking or sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those sales and trading departments may conflict with your interests.

Legal Entities

To U. S. Residents

Standard New York Securities, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is also a member of the FINRA and SIPC. Standard Americas, Inc is registered as a commodity trading advisor and a commodity pool operator with the CFTC and is also a member of the NFA. Both are affiliates of Standard Bank Plc and Standard Bank of South Africa. Standard New York Securities, Inc is responsible for the dissemination of this research report in the United States. Any recipient of this research in the United States wishing to effect a transaction in any security mentioned herein should do so by contacting Standard New York Securities, Inc.

To South African Residents

The Standard Bank of South Africa Limited (Reg.No.1962/000738/06) is regulated by the South African Reserve Bank and is an Authorised Financial Services Provider.

To U.K. Residents

Standard Bank Plc is authorised and regulated by the Financial Services Authority (register number 124823) and is an affiliate of Standard Bank of South Africa. The information contained herein does not apply to, and should not be relied upon by, retail customers.

To Turkey Residents

Standard Unlu Menkul Degerler A.S. and Standard Unlu Portfoy Yonetimi A.S. are regulated by the Turkish Capital Markets Board (“CMB”). Under the CMB’s legislation, the information, comments and recommendations contained in this report fall outside of the definition of investment advisory services. Investment advisory services are provided under an investment advisory agreement between a client and a brokerage house, a portfolio management company, a bank that does not accept deposits or other capital markets professionals. The comments and recommendations contained in this report are based on the personal opinions of the authors. These opinions might not be appropriate for your financial situation and risk and return preferences. For that reason, investment decisions that rely solely on the information contained in this presentation might not meet your expectations. You should pay necessary discernment, attention and care in order not to experience losses.

To Singapore Residents

Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

Important Regional Disclosures

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company(ies) within the past 12 months.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors:

The non-U.S. research analysts (denoted by an asterisk*) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts (denoted by an asterisk*) may not be associated persons of Standard New York Securities Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Each analyst (denoted by an asterisk*) is a Non-U.S. Analyst. The analyst is a research analyst employed by The Standard Bank Group Limited.

General

This research report is based on information from sources that Standard Bank Group believes to be reliable. Whilst every care has been taken in preparing this document, no research analyst or member of the Standard Bank Group gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy or completeness of the information set out in this document (except with respect to any disclosures relative to members of the Standard Bank Group and the research analyst’s involvement with any issuer referred to above). All views, opinions and estimates contained in this document may be changed after publication at any time without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors or any particular class of investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Members of Standard Bank Group may act as placement agent, advisor or lender, make a market in, or may have been a manager or a co-manager of, the most recent public offering in respect of any investments or issuers referenced in this report. Members of the Standard Bank Group and/or their respective directors and employees may own the investments of any of the issuers discussed herein and may sell them to or buy them from customers on a principal basis. This report is intended solely for clients and prospective clients of members of the Standard Bank Group and is not intended for, and may not be relied on by, retail customers or persons to whom this report may not be provided by law. This report is for information purposes only and may not be reproduced or distributed to any other person without the prior consent of a member of the Standard Bank Group. Unauthorised use or disclosure of this document is strictly prohibited. By accepting this document, you agree to be bound by the foregoing limitations. Copyright 2011 Standard Bank Group. All rights reserved.