Rand stronger; Grexit still looms

• Time is running out. Greece and its main creditors (i.e. the IMF, ECB and EU) are yet to reach an agreement. With the June 30th deadline fast approaching, talks on Saturday will be particularly significant as in mid-July, the first marketable debt payment falls due.

• EM currencies’ performance was mixed, as too were the equity markets, on news of yet another disagreement around the Greek crisis. The rand, however, maintained its resilience and closed stronger at 12.11.

• Yesterday’s US Personal Consumption expenditure (PCE) deflator was in line with Bloomberg consensus expectations, coming in at 0.2% y/y in May from 0.1% y/y in April. Other inflation expectation measures are higher in the US, which is also why we still expect the Fed to hike in September.

• The Bureau for Economic Research (BER) released its Q2:15 inflation expectations survey yesterday. The results of the survey saw inflation expectations increase both this year and next year by 0.2 percentage points, to 5.6% (2015) and 6.1% (2016) respectively.

• The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, ahead only of the NZD, and put in the second-best performance amongst the EM currencies, behind only the TRY. The rand traded between a low of USDZAR12.0538 and a high of USDZAR12.1598.

International developments

Greece and its main creditors (i.e. the IMF, ECB and EU) are yet to reach an agreement. Greece seems unwilling to push through specifically tax increases. With the June 30th deadline fast approaching, it now seems that talks on Saturday will be particularly significant in order to decisively reach an agreement. Then, towards the midlle of July, the first marketable debt payment is due. That may be crunch-time for Greece.

Our G10 Strategist, Steve Barrow, notes that it is hard to think that a “successful” resolution of the Greek crisis will bring unbridled joy to the euro zone economy. What’s more, when we bear in mind the second implication, which relates to the structural growth impediments that might have been raised by the Greek crisis, things look bleak. Steve is of the view that that there cannot actually be a “good” resolution of the crisis; just one that’s less bad (than Grexit). Should no deal be reached, ministers would have to chart ways of managing the consequnces of a Grexit. It seems suicidal, however, to allow a Greek exit from the EMU.

Its is reasonable to think that markets have become less senstitve to the Greece news by now which has dominated financial markets for some time now. EM currencies’ performance was mixed, as too were the equity markets, on news of yet another disagreement around the Greek crisis. The rand, however, maintained its resilience, and traded in a range of around 12.05 to 12.15. It closed the day stronger at 12.11.

Yesterday’s US Personal Consumption expenditure (PCE) deflator registered in line with Bloomberg consensus epxctations, coming in at 0.2% y/y in May from 0.1% y/y in April. Other inflation expectation measures are higher in the US, and that is one reason why we still expect the Fed to hike in September. Worth noting, US breakeven inflation, as implied by the 10-year bond maturities, has crept up steadily beginning June, from around 1.80% to the current 1.95%. The 5y5y inflation swap put inflation expectations in 5 years’ time at 2.35%, while the Universtity of Michiogan 5-year to 10-year surveyed expectations are currently at 2.7%, due for release later today.

Local developments

The Bureau for Economic Research (BER) released its Q2:15 inflation expectations survey yesterday. The results of the survey saw inflation expectations increase both this year and next year by 0.2 percentage points. Average CPI inflation expectations for 2015 of analysts, business people and trade union representatives increased from 5.4% in Q1:15 to 5.6% in Q2:15. Inflation expectations for 2016 increased from 5.9% in Q1:15 to 6.1% in Q2:15. The view amongst respondents, however, diverged. Analaysts and businesses revised their forecasts up, while trade union officials lowered their forecasts. Average 5-year inflation expectations also increased in Q2:15, from 5.8% to 6.0%.

Markets

The rand strengthened further on Thursday, closing at 12.11, compared to Wednesday’s close of 12.15. The rand’s appreciation against the greenback occurred in line with dollar weakness against most of the major currencies; the dollar posted losses against the pound (0.3%) and the yen (-0.2%), but gained ground against the euro, albeit marginally. The rand gained ground against all of the major crosses; the rand gained ground against the euro (-0.4%), the yen (0.2%) and the pound (-0.1%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the NZD and put in the second-best performance amongst the EM currencies, only behind the TRY. The rand traded between a low of USDZAR12.0538 and a high of USDZAR12.1598.

Commodity prices were mixed on Thursday. Platinum and copper were up on Thursday, by 0.8% and 0.5% respectively. Gold was down by 0.2% on the day. The price of Brent closed 0.5% lower, at $63.20/bbl. Both the developed world MSCI and the MSCI EM were down on Thursday, by 0.2% and 0.5% respectively. The ALSI was up by 0.1% on the day. Non-residents were net buyers of equities (ZAR21 million) on Thursday. The EMBI spread widened by 2 bps on Thursday, while SA’s 5yr CDS narrowed by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 5.7%.

Latest SA publications

SA Macroeconomics: May PPI rises to 3.6% from 3.0%: Food, beverages and petrol contribute to the acceleration by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 June 2015)

SA Macroeconomics: CAD narrows to a better than expected 4.8% of GDP: Trade deficit widens but dividend receipts rise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 June 2015)

SA Macroeconomics: The CAD is anyone’s guess, ours is 4.8% of GDP: Portfolio flows to EMs falter by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 June 2015)

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)