Standard Bank Research Team
Standard Bank
The US CPI data today is expected to show a 0.3% m/m rise in headline inflation and a 0.2% m/m increase outside of food and energy. Steve thinks that the risk lies to the downside and as such thinks that it certainly seems advisable to be biased towards a bearish dollar position as we get close to the release of the price data.
The rand strengthened on Thursday, closing below 12.00 at 11.96, compared to Wednesday’s close of 12.06. The rand traded between a low of USDZAR11.9323 and a high of USDZAR12.0958 intraday.
Yesterday, we published our FX Weekly: ZAR: less undervalued and still vulnerable against the dollar. We updated our equilibrium-value analysis of the rand. From this updated analysis, it is clear that while the rand is still undervalued, it is no longer as undervalued as it was six months ago. The rand is cheap, but not as cheap as before given the asymmetry of moves against the majors over the past year – principally, weakness against the dollar but strength against the euro.
While the rand is undervalued, we have long held that, as a commodity currency, before the rand can convincingly unwind some of this “cheapness”, we would likely need to see a positive turn in the commodity cycle. Our commodities team’s does not expect a broad-based upturn in commodities to be evident until next year – and even then this is only expected to be modest. This underscores our view that the rand is likely to remain largely on the back-foot against the dollar over the next 12 months – barring perhaps a temporary sell-the-fact slide in the dollar towards the end of this year.
We pin the mid-point of our anticipated USDZAR trading range at 12.10 for Q2:15. We maintain our bias towards rand weakness against the dollar into the approach of Fed “liftoff”, setting our mid-point forecast for Q3:15 at 12.35.
International developments
Another day and another poor set of US data yesterday in the shape of the housing numbers and claims data. The numbers helped soften the dollar but the fact of the matter is that the dollar is not really dancing to the tune of the data. It is quite clear that data “surprises” from the Eurozone have flipped from being negative to positive – when compared to US data surprises – and yet euro/dollar has tumbled over this period. Instead of dancing to the tune of the data, the market is responding to the outlook for higher US rates and the ongoing QE from the ECB.
Steve Barrow (our G10 FIC Strategist) points out that the Fed is not really that wound up in the nitty gritty of month-to-month data like house starts, retail sales and other data that comes down the US data calendar every month. What the Fed’s really interested in is the longer-term possibility that its aims with respect to maximum employment and PCE inflation of around 2.0% could be compromised by keeping policy too easy for too long. This means that the economic data is important to the extent that it challenges the Fed’s aims, not that numbers might be a bit higher or lower than the market consensus each month. Of course, when we get right down to the specific timing of rate hikes, a burst of strong or weak data might alter the timing of the rate move by a meeting or two, but it’s not really going to alter the future path of Fed (or ECB) policy materially. And, as we’ve seen already, not really alter the course of euro/dollar.
The US CPI data today is expected to show a 0.3% m/m rise in headline inflation and a 0.2% m/m increase outside of food and energy. Steve points out that in terms of core prices, there’s a big skew to the low side with economists almost undecided between a 0.1% m/m increase and 0.2% m/m. For instance, some 40% of the 81 respondents in the Bloomberg survey see the chance of a 0.1% m/m print, while just 2.5% see the possibility of a number above 0.2% m/m. Steve agrees that the risk lies to the downside and thinks it would certainly seem advisable to be biased towards a bearish dollar position as we get close to the release of the price data.
Markets
The rand strengthened on Thursday, closing below 12.00 at 11.96, compared to Wednesday’s close of 12.06. 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 euro (0.7%), the pound (0.6%) and against the yen (-0.1%). The rand gained ground against most of the major crosses; the yen (0.6%) and the pound (-0.3%), but remained unchanged against the euro. The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the CAD, and put in the best performance amongst the EM currencies. The rand traded between a low of USDZAR11.9323 and a high of USDZAR12.0958 intraday.
Commodity prices were mixed on Thursday. Gold and platinum were both down by 0.3% and 0.1% respectively, while copper was up by 1.8%. The price of Brent increased on Thursday, by 6.1%, to close higher at $63.98/bbl. Both the developed world MSCI and the MSCI EM were up on the day, by 0.2% and 1.5% respectively. The ALSI increased by 1.0% on the day to another new record high. The EMBI spread widened by 2 bps, while SA’s 5yr CDS narrowed by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 1.9%.
Latest SA publications
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)
SA Macroeconomics: Economics Note: Trade balance & PSCE this week: Fitch on the sovereign; PPI declines; employment rises; & wage negotiations continue by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (30 March 2015)
SA Macroeconomics: Economics Note: Weaker growth, higher inflation, unchanged repo rate: Hawkish tone, but SARB's outlook still does not justify a hike by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 March 2015)
SA Fixed Income MPC Comment: Defending not to hike by Asher Lipson and Walter de Wet (26 March 2015)
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