• We are off to a slow start, with few data releases today.

  • Apart from the ongoing gyrations around Greece debt talks, the next few days are likely to be dominated by the upcoming US PCE deflator – a key inflation indicator for the US Fed – as well as domestic data in South Africa, especially the current account.

  • The rand strengthened in late afternoon trade on Friday as US equity markets struggled and bonds gained. The rand closed at 12.16, compared to Thursday’s close of 12.25. The rand’s appreciation against the greenback occurred in line with dollar weakness against some of the major currencies.

  • Worth noting is that equity markets in China continue to capitulate, with the Shanghai Composite Index down -6.4% so far this morning.

  • The SARB will release the June Quarterly Bulletin tomorrow. From a currency perspective, we have a particular interest in the current account.

  • Rand strength since Friday has brought USDZAR back to the support area of 12.15. The USDZAR hit a high of 12.2775 but 12.30 remains a strong resistance area.


International developments

Apart from the ongoing gyrations around Greece debt talks, the next few days are likely to be dominated by the upcoming US PCE deflator – a key inflation indicator for the US Fed – as well as domestic data in South Africa, especially the current account.

The rand strengthened in late afternoon trade on Friday as US equity markets struggled and bonds gained. The S&P and Dow closed down 0.53% and 0.55% respectively, while the US 10-year bond yield moved from 2.31% down to 2.26%.

As far as Greece is concerned, talks continue. Media reports indicate that Greece will put forward a revised proposal for consideration by the ECB and Euro finance minister today. In general, there seems to be renewed optimism that some compromise may be reached as the end-of-the-month deadline looms. If there is indeed some progress, we would look for the rand to find support.

The Personal Consumption expenditure (PCE) deflator in the US remains low – the latest print for April showed an increase of only 0.1% y/y. The PCE deflator is a broader measure of price pressures in the US economy than inflation. Expectations are for the PCE deflator to have ticked up to 0.2% y/y in May. We would expect USTs, local bonds and the rand to find support should the PCE deflator surprise on the downside. US PCE is due for release on Thursday.

Worth noting is that equity markets in China continue to capitulate, with the Shanghai Composite Index down -6.4% so far this morning. Equities in Shanghai have lost 13.4% of their value in the past five trading sessions. Concerns over the Chinese economy may push more money back into global bonds markets.


Local developments

The SARB will release the June Quarterly Bulletin tomorrow at 10h00. While there is a host of information therein telling of the state of the SA economy, we will look to the current account numbers for Q1:15, in so far as it impacts the rand. Bloomberg consensus is pencilling a current account deficit (CAD) of 5.1% of GDP in Q1:15, unchanged from Q4:15. Standard Bank expects a slight compression of the deficit to 4.8% of GDP. The CAD remains a major drag on the rand especially in the face of a potential Fed rate hike and turmoil in the Eurozone over Greece and its debt payments.

We also expect the CAD to widen back towards -6% of GDP in Q4:16. We believe that the rand will remain under pressure which in turn would provide upward pressure on inflation and inflation expectations (all else equal). This would be consistent with our base case for a 25 bps repo rate hike in Q3:15, most likely at the July meeting.


Markets

The rand strengthened further on Friday, closing at 12.16, compared to Thursday’s close of 12.25. The rand’s appreciation against the greenback occurred in line with dollar weakness against some of the major currencies; the dollar posted losses against the yen (-0.2%) adnd marginally against the pound, but gained ground against the euro (-0.1%). The rand gained ground against all the major crosses; the euro (-0.7%), the pound (-0.7%) and the yen (0.5%). The rand put in the second-best performance amongst the commodity currencies we monitor for purposes of this report, behind only the NOK and put in the best performance amongst the EM curremcies. The rand traded between a low of USDZAR12.1439 and a high of USDZAR12.2792.

Commodity prices were mixed on Friday. Copper and gold were down on Friday, by 1.7% and 0.1% respectively. Platinum was up by 0.2% on the day. The price of Brent closed 1.9% lower, at $63.02/bbl. Both the developed world MSCI and the MSCI EM were down on Friday, by 0.3%. The ALSI was down by 0.2% on the day. Non-residents were net sellers of equities (ZAR4.316 billion) on Friday. The EMBI spread widened by 4 bps on Friday, while SA’s 5yr CDS narrowed by 3 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 5.8%.


Latest SA publications

SA FIC Weekly: The three risks ever clearer - evolution of the main risks to the SARB’s inflation forecast by Walter de Wet and Shireen Darmalingam (17 June 2015)

Credit & Securitisation Weekly: Medupi update by Steffen Kriel and Varushka Singh (19 June 2015)

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)

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