BOJ stands still… but for how long?

FX

As widely anticipated, the BoJ announced no change to monetary policy today. The Bank remained confident that, despite the sales-tax increase (which only came into effect last week), the economy would remain on a recovery path. However, the analyst community remains sceptical. A survey conducted by Bloomberg before today’s announcement shows that the majority of those polled predict that the BoJ will expand monetary stimulus before July this year. More easing from the BoJ, while the Fed presses forward with policy normalisation, should see yen weakness over the medium-term. Steve Barrow (our G10 Strategist) predicts that the yen will reach 120 against the dollar over a 12-month horizon.

As part of her labour market ‘dashboard’, Fed Chair Yellen has mentioned measures of labour market turnover, such as quits, job openings and hires rates. All of these measures are published in the BLS Job Openings and Labor Turnover (JOLTS) data report. The JOLTS report for February will be released today. Given rhetoric from Yellen and in the FOMC Statement highlighting that the Bank will look at a “wide range of information” when assessing labour market conditions and overall economic activity, these numbers might now receive more than the usual attention. As with last Friday’s Employment Situation Report, today’s release will be gleaned for indications that the dials of Yellen’s labour market dashboard are still “moving in a direction of improvement” – that is, that the outlook for the labour market remains consistent with the FOMC’s planned “measured steps” towards policy normalisation. As per the January JOLTS data, the quits rate remained low; but it has been rising, thereby pointing to a healthier economy. As Yellen put it, “[w]hen workers are scared they won’t be able to get other jobs they show a reduced willingness to quit their jobs”. The job openings rate has also been rising. However, the hires rate has remained “extremely depressed”, signaling weakness in the labour market. Capital Economics reported yesterday that Turkey’s central bank (the CBRT) has signalled a more dovish stance in response to appreciation of the Turkish lira. Governor Basci has hinted at measures as soon as this month to loosen monetary conditions. He said that a “measured step” to loosen monetary policy could be considered at the 24 April MPC meeting. The CBRT hiked rates aggressively after an emergency meeting in January. Capital Economics does not expect the CBRT would cut rates, perhaps preferring instead to remunerate banks required reserves and/or could reduce required reserves. Basci indicated that he thought Turkey’s inflation rate could fall to the 5.0% year-end target by 2015, and that recent monetary tightening had improved the economy’s resilience to shocks. Capital Economics is less optimistic regarding the inflation outlook, and is concerned that capital flows encouraged by the ruling party’s strong showing in local elections will be short lived. Turkey’s current account deficit remains wide at 8.0% of GDP, which means that the country remains heavily dependent on foreign capital flows. The group believes that it would take an extended period of subdued domestic demand growth to lower the import bill. It argues that it would be more prudent for the CBRT to leave policy as is, and that monetary loosening could make the lira vulnerable to another sell-off.

The rand strengthened further against the dollar yesterday, closing at USDZAR10.53 compared with Friday’s close of USDZAR10.56. This occurred into dollar weakness against major crosses, a mostly stronger performance across commodity currencies and a mixed performance across the EM currencies we track for purposes of this report. The dollar weakened against the euro, the pound and the yen, with the biggest move seen against the euro (0.3%). The rand strengthened against all of the major crosses, with the biggest move seen against the dollar (-0.3%). All but one of the commodity currencies we monitor for purposes of this report strengthened against the dollar on the day; the exception was the AUD. The rand was the best-performing commodity currency and second-best-performing EM currency (beaten only by the BRL). The rand traded between a low of USDZAR10.5072 and a high of USDZAR10.5736. Support from where the rand opened this morning sits at 10.5000, 10.4550 and 10.3700. Resistance levels sit at 10.6000, 10.6800, 10.7400 and 10.8350.

Turning to commodity prices, platinum, Brent and gold fell by 1.5%, 0.8% and 0.5% respectively. Copper meanwhile rose by 0.9%. The ALSI fell by 0.8%, while the EM MSCI rose by 0.2%. The EMBI spread widened by 6 bps, while the SA’s five-year CDS spread was unchanged. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 11.5%.

Non-residents were aggressive net buyers of local equities (ZAR2 243 million) and were mild net buyers of local bonds (ZAR218 million) on the day. Buying of bonds was seen in the shorter-dated 3-7 (ZAR243 million) and 1-3 (ZAR130 million) year buckets. Selling of bonds was meanwhile seen in the longer-dated 12+ (-ZAR141 million) and 7-12 (-ZAR13 million) year segments. Bond yields fell by between 0.5 of a bp (R203 an R214) and 4 bps (R208). The 3x6, the 6x9 and 12x15 FRAs fell by 2 bps, 3 bps and 5 bps respectively.

In local labour news, AMCU plans to march to the British Embassy this week to deliver a memorandum of demands with respect to the wage strike that is in its eleventh week in the platinum sector. Joseph Mathunjwa, AMCU president, has said that members would also march to Parliament in Cape Town before the general elections on 7 May 2014. Mathunjwa said that the union will “shift into higher gear by asking their children to leave school and join them in the industrial action...” in order for the employers to meet their demands. Mathunjwa also said, “Hunger has not been introduced by this strike. If we had an investment company I would take money and buy workers food every day (during the strike)… If Ethiopia, considering the hunger in that nation, still exists, then 10 weeks (of strike) won’t kill us. If the government and employers are sympathetic to your cause why are they not acceding to the R12 500 demand? If the government is sympathetic they must compromise half of their mine tax to subsidise mineworkers’ salaries. And if (Lonmin CEO Ben) Magara is sympathetic that indeed you are hungry, he must establish a soup kitchen and distribute bread at Wonderkop (in Marikana) every day.” Amplats, Implats and Lonmin executives were reportedly planning to introduce automation at their operations and closing down some shafts. The mine bosses believe that AMCU’s demands were too expensive and have indicated that their offer of a 9% wage increase still stands and is waiting to be accepted.

FI

At today’s nominal government bond auction, NT is planning to raise ZAR1.00bn in the R2030, ZAR800m in the R209 and ZAR550m in the R2048. Over the past five trading days, foreign interest in these three bonds has been negative on a net basis, with outflows of -ZAR340m recorded in the R209, -ZAR264m in the R2048 and a marginal -ZAR63m in the R2030. Demand fell steeply at last Tuesday’s offering of the R2023, R213 and R214, with total bids recorded at ZAR3.50bn for an auction bid/cover of 1.5x.

Local government bond yields fell by between 0.50 of a bp and 4.00 bps across the curve yesterday, as SAGBS continued to move stronger following Friday’s rally of local and EM financial markets. The yields on the R157 and R2037, however, remained unchanged from Friday’s closing levels (6.73% and 8.97% respectively). The largest incremental moves were recorded at the shorter-end of the curve, while smaller moves were observed with increased bond tenor.

The yields on the R208 and the R2023 fell by the largest increment, 4.00 bps each, to 8.12% and 8.24% respectively, while the R207 fell by 2.00 bps to 8.01%. The R209, R214 and R2048 saw their yields fall by 0.50 of a bp each. The R186 recorded a 2.50 bps decline in its yield to 8.37%. The spread on the R186/R157 compressed by 2.50 bps yesterday, to 164.00 bps, while the R213/R186 spread widened by 1.00 bp to 38 bps, and the R2048/R186 spread widened by 3.00 bps to 68.00 bps. SA’s CDS spread deteriorated yesterday, back to Thursday’s spread of 195.5 bps, after compressing to 190.50 bps on Friday. Total SAGB turnover was recorded at a paltry ZAR10.48bn yesterday. ZAR9.50bn of this turnover was due to nominal bonds, with ZAR5.16bn in the R186 alone.

US Treasury yields continued to fall yesterday, after recording sharp moves lower on Friday. The 10-year UST yield fell to an intraday strong point of 2.68%, and closed at a yield of 2.71%. Prior to Friday’s nonfarm payrolls data print, the 10-year yield was trading slightly north of 2.80%. The 5-year note fell by close to 2.00 bps yesterday, to 1.68%.

Foreigners purchased +ZAR218m of nominal SAGBs yesterday, with buying seen mainly at the shorter-end of the curve. +ZAR130m was purchased in the 1-3 year maturity category due solely to net buying in the R157. Foreigners bought +ZAR243m in the 3-7 year segment; the R208 which recently moved into the 3-7 year category recorded net inflows of +ZAR201m. Foreigners sold -ZAR141m in the 12+ year segment; within the bucket net selling was recorded in the R209 (-ZAR340m), while notable net buying was recorded in the R186 (+ZAR121m) and the R2048 (+ZAR107m).

Latest SA publications

FX Weekly: The SARB & the rand: the new abnormal by Bruce Donald, Marc Ground and Varushka Singh (4 April 2014)

Credit & Securitisation Monthly: Quarterly update: Q1:2014 by Robyn MacLennan and Steffen Kriel (4 April 2014)

FX Flash Note: MPC meeting: “What is normal?” by Bruce Donald, Marc Ground and Varushka Singh (28 March 2014)

Fixed Income Weekly: March MPC amidst different EM conditions by Asher Lipson and Kuvasha Naidoo (20 March 2014)

In |Economics|FixedIncome|Currencies|Commodities > South Africa • The Daily