Local trade data: a signal on Q2:14 current account

FX

On the local data front, today sees the release of PPI and preliminary trade statistics. Most important among these from a currency market perspective is the trade balance. The preliminary trade balance narrowed to -ZAR6.6 billion in May, from a downwardly revised -ZAR12.4 billion (-ZAR13.0 billion previously) in April. Consensus has the trade deficit for June narrowing only slightly to -ZAR6.3 billion, with the impact of PGM industry strikes still likely to weigh on export numbers for that month. The preliminary trade numbers for Q2:14 so far are slightly worse than the cumulative April and May readings of last year (-ZAR19.0 billion and -ZAR18.5 billion respectively). Consequently, from a purely trade balance perspective, the current account as a percentage of GDP looks set to push above -6.0% in Q2:14 – the reading for Q2:13 was -6.2%, with a marginal trade deficit of -ZAR1.0 billion recorded in June of that year). Renewed widening of the current account shortfall could once again cause the market to question whether the currency has done enough work to deliver the necessary current account compression that might be required by more challenging external financing conditions. Such uncertainty would leave the rand in a vulnerable position.

Local PPI numbers for June will offer a signal on the severity of any pipeline inflationary pressures – and an elevated level of producer inflation might also be a harbinger of escalating pass-through. The Bloomberg consensus forecast is for headline PPI inflation to fall to 8.4% y/y from 8.7% y/y in May. Since a lower-than-expected PPI inflation reading would be interest-rate-positive, it could as a consequence be rand-negative.

Nersa yesterday announced its decision regarding Eskom’s regulatory clearing account (RCA) application, pertaining to the second Multi-Year Price Determination period (or MYPD 2, 2010/11 to 2012/13). The regulator determined that the utility is entitled to recover ZAR7.8 billion implying an increase in electricity tariffs that will likely be implemented from 1 April next year. Charles Hlebela, a spokesman for Nersa, said that electricity prices would have to increase by a further 2 percentage points (pps) to 5 pps, over and above the current annual 8% allowed by the regulator under MYPD 3 (applicable to 2013/14 to 2017/18). In its July MPC Statement, the SARB mentioned, albeit perhaps indirectly, the threat of “possible higher tariff increases being granted to Eskom” as one upside risk to its inflation outlook.

As widely anticipated, the FOMC announced no major changes to its current policy path yesterday. The Committee decided to reduce asset purchases by another USD10 billion, keeping it on track to end the programme by the October FOMC meeting. There was no explicit indication in the Statement released after the meeting regarding the policy normalisation measures that might follow the conclusion of the Fed’s bond-buying programme. The minutes of the meeting, to be released on 20 August, might be more telling in this regard. There were some subtle changes though to the Statement. The Committee no longer described the unemployment rate as “elevated”, merely stating that it had declined further. However, the Committee did supplement this by stating that “a range of labor market indicators suggests that there remains significant underutilization of labor resources”. The Committee also removed language describing inflation persistently below its 2 percent objective as “pos[ing] risks to economic performance”. This time the Committee described the likelihood of inflation running persistently below 2 percent as having “diminished somewhat”. This could be read as a slightly more hawkish tilt. This time also, one Committee member chose to dissent. Philadelphia Fed President, Charles Plosser, a noted hawk, objected to the use of “a considerable time” in providing guidance regarding the appropriateness of keeping the fed funds rate at current levels after the asset purchase program ends. Plosser felt that such “time dependent” language did “not reflect the considerable economic progress that has been made toward the Committee’s goals”. The FOMC’s next meeting (17 to 18 September) might offer an opportune time to communicate the Committee’s plans for policy normalisation after asset purchases end, given that it will be accompanied by a post-meeting press conference. As such, as we approach the September meeting, risky assets could be in for a bumpy ride, although we don’t think that the reaction will be as dramatic as last year’s taper tantrums.

The rand weakened further against the dollar yesterday, closing at USDZAR10.66, compared with Tuesday’s close of USDZAR10.60. Local currency depreciation occurred in tandem with a strong performance from the dollar against the major crosses. The rand depreciated alongside a weak performance from all of the commodity and most of the EM currencies we monitor for the purposes of this report. The dollar strengthened against the pound, the euro and the yen, with the biggest move seen against the yen (0.6%). As mentioned before, all five commodity currencies we monitor depreciated on the day. All but two of the EM currencies we monitor for the purposes of this report depreciated on the day. The exceptions were the INR and the IDR – the INR appreciated and IDR remained unchanged. The rand ranked second-worst (beating only the AUD) in the commodity currencies category and was fourth-worst in the EM currencies category. The rand traded between a low of USDZAR10.5781 and a high of USDZAR10.7171. Support from where the rand opened this morning sits at 10.5650, 10.4850, 10.4560 and 10.4025. Resistance levels sit at 10.7400 and 10.8500.

Turning to commodity prices, Brent, gold and copper fell by 1.1%, 0.2% and 0.2% respectively. Platinum meanwhile rose by 0.2%. The ALSI fell by 0.9% and the EM MSCI fell by 0.2%. The EMBI spread narrowed by 11 bps and the SA CDS 5yr spread narrowed by 2 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose 0.4%.

Non-residents were mild net buyers of local equities (ZAR107 million) and were mild net sellers of local bonds (-ZAR257 million) on the day. Selling was seen in the 12+ (-ZAR694 million), 1-3 (-ZAR447 million) and 7-12 (-ZAR41 million) year buckets. Buying was meanwhile seen in the 3-7 (ZAR925 million) year segment. Bond yields rose by between 4 bps (R203) and 6 bps (R208 and R186) on the day. The 6x9 and 12x15 FRAs both rose by 5 bps; while the 3x6 FRA rose by 3 bps.

FI

SAGBs and the rand sold-off yesterday; this was in line with the general EM trend on the back of a better-than-expected growth number in the US. This could support the argument for US policy normalisation being brought forward. At the conclusion of the US FOMC meeting yesterday, the rate was held at 0.25% in line with Bloomberg consensus expectations. We expect the local and EM markets to remain at slightly weaker levels ahead of tomorrow’s US nonfarm payrolls.

June’s budget surplus was +ZAR27.66bn, better than our expectations of a +ZAR26.11bn surplus. The figure is the largest June figure in several years and is a particularly important month, as it is the first of the fiscal year where substantial corporate taxes are received. Cumulatively, this takes the 2014/15 fiscal year deficit to -ZAR34.81bn, lower than the previous fiscal year’s -ZAR37.09bn at the same time. June saw corporate taxes of ZAR49.69bn received, with 25.6% of the estimated corporate taxes for the year having now been received. By June 2013/14, a slightly higher 26.5% of the budget estimate for corporate taxes had been received. 22.7% of the estimated revenue has been received this fiscal year, slightly behind the 23.0% that had been received by June 2013/14. However, spending is also slightly behind the same time last year; 22.2% of the budget estimate for expenditure has been completed in this fiscal year, compared with 22.6% by June 2013/14. ZAR34.8bn of financing has been raised in the current fiscal year, compared to ZAR33.4bn in the previous fiscal year. July’s dual tranche offshore issue would not be included in these figures. Today, the market will be focussed on the trade balance for June, with Bloomberg consensus at -ZAR6.3bn.

While the rand moved largely sideways for most of yesterday’s trading session, SAGBs began selling-off shortly after the local trading session opened. However, it was the release of a better than expected US Q2:14 GDP number which saw a sharp sell-off in EM currencies, bonds and US Treasuries. US GDP printed at 4.0% annualised q/q against a lower consensus prediction of 3.0% annualised q/q and the prior quarter’s -2.1% q/q (revised more favourably from -2.9% q/q). USDZAR depreciated by 5c to 10.66, but was not the worst performer relative to the EM currencies we monitor.

SAGBs yields rose by between 4.00 bps and 6.00 bps across the curve, with the largest incremental weakening occurring at the belly of the curve. At the short-end, the yield on the R157 rose by 4.00 bps to 6.69% and the yield on the R203 and R204 rose by 4.50 bps and 5.50 bps to 7.10% and 7.41% respectively. The yield on the R186 rose by the largest increment, of 6.00 bps to 8.28%. The R2030 and the R2032 also rose by 6.00 bps on the day. At the extended-segment of the curve, the yields on the R209, R2037, R214, R2044 and R2048 all rose by 5.00 bp each. The US Treasury curve steepened yesterday, as USTs weakened overall. The yields on the 2yr and 5yr USTs rose by 1.58 bps and 7.95 bps respectively, to 0.56% and 1.77%. At the longer-end, the yields on the 10yr and 30yr notes rose by 9.68 bps and 8.78 bps, ending the US trading session at 2.56% and 3.31% respectively.

While the front-end of the local yield curve steepened yesterday, the belly of the curve remained unchanged and the back-end of the curve flattened marginally. At the front-end, the spread on the R186/R157 widened by 2.00 bps to 159.50 bps; the spread on the R213/R186 at the belly remained unchanged, ending the day at 45.50 bps; and at the back-end, the spread on the R2048/R186 compressed by 1.00 bp to 78.00 bps. Total SAGB turnover fell to ZAR18.09bn yesterday, from ZAR28.20bn on Tuesday, with the large volume on the day owing to the nominal SAGB auction. ZAR17.82bn of yesterday’s turnover was due to nominal SAGBs, and 30% of this turnover was recorded in the R203 and 20% was recorded in the R186.

Non-residents were net sellers of nominal SAGBs yesterday, for a total of -ZAR257m. Noticeable outflows were recorded in the R157 (-ZAR395m) in the 1-3 year segment, and at the longer-end, outflows were recorded in the R186 (-ZAR469m), R214 (-ZAR264m) and R209 (-ZAR124m) in the 12+ year segment. Notable inflows were meanwhile seen in the R203 (+ZAR518m), R207 (+ZAR352m) and R204 (+ZAR109m) in the 3-7 year segment, and in the R213 (+ZAR269m) in the 12+ year category.

In line with a sell-off in US Treasury yields, EM FI markets weakened yesterday. 5yr EM bond yields rose by 1.96 bps on average, and 10yr yields rose by 4.33 bps on average. Mexico’s 5yr note recorded the worst performance, with the yield rising by 6.80 bps on the day, while the 10yr note recorded the second-worst performance, with the yield rising by 9.80 bps, behind an even weaker performance by Brazil’s 10yr yield, which rose by 14.00 bps. SA’s 5yr yield rose by 5.10 bps yesterday (underperforming the EM average), and the 10yr yield rose by 5.30 bp (also underperforming the EM average). Indonesia’s 5yr note recorded the best performance, with the yield declining by 1.20 bps and the 10yr yield declining by 0.70 bps (recording the second-best performance in this tenor). Hungary’s 10yr noted recorded the best performance, with the yield declining by 1.00 bp.

EM currencies sold-off on balance yesterday. The rand depreciated by 0.50% yesterday, performing better compared with other EMs which saw their currencies sell-off by more on the day. The moves weaker were led by the Turkish lira, which depreciated by 0.77%, followed by a depreciation in the Mexican peso of 0.66% and Brazilian real of 0.65%. Other EM currencies to depreciate on the day were the Thai bhat (0.37%), Polish zloty (0.24%), Hungarian forint (0.21%) and the Russian ruble (0.17%).

The failure of the Republic of Argentina to make a USD539m interest payment yesterday, following a 30-day grace period (beginning on 30 June 2014) saw ratings agency S&P lower their unsolicited “long- and short-term foreign currency sovereign credit ratings on Argentina to selective default (‘SD’) from ‘CCC-/C’, indicating that Argentina defaulted on some of its foreign currency obligations”. The default pertains to Argentina’s Discount Bonds which matures in December 2033. This is part of a long-running legal case in US courts, over repayments on restructured debt, after Argentina’s previous default.

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