ZAR weaker ahead of the US NFP data release on Friday

• Equities remained on the back foot yesterday as volatility and uncertainty drove sentiment. The Dow Jones and S&P closed the day lower, as did the FTSE. However, Asian equity markets were supported by better-than-expected data out of China and Japan this morning.

• Although the rand was steady yesterday trading in a very narrow range, the currency refuses to strengthen against the dollar. The market remains sensitive to a possible rate hike by the Fed in September (despite expectations seemingly having shifted slowly but surely in favour of a hike in December).

• The rand continued to lose ground on Tuesday, hitting a high of 12.7404 against the dollar in late afternoon trade, closing the day at around 12.74. It is likely to remain under pressure today ahead of the US non-farm payrolls data due for release on Friday.

• Comments by FOMC voting member Dennis Lockhart of still expecting a rate hike in September as a real possibility and that he would need to see a “significant deterioration” to hold off much longer for a rate hike pushed the dollar stronger and USTs lower.

• As precursor to Friday’s US employment data, we will see the release of US ADP employment data today. Although the ADP and US NFP data tracks one another broadly, the m/m correlation between the two data sets is not necessarily strong.

• The Standard Bank South Africa PMI July data is scheduled for release at 09h15 today. Expectations are for the PMI to have remained below the 50-benchmark line in July.

International developments

Equities remained on the back foot yesterday as volatility and uncertainty drove sentiment. The Dow Jones and S&P closed the day lower, as did the FTSE. Asian equity markets, however, were supported by better-than-expected data out of China and Japan this morning. The Caixin China PMI services index increased to 53.8 pts in July from 51.8 pts in June, its fastest pace since August 2014, while Japan’s services index remained above the 50-benchmark line. This helped Japan’s Nikkei which was up 0.8% this morning, and Hong Kong’s Hang Seng also gained in earlier trade today.

Although the rand was steady yesterday trading in a very narrow range, the currency refuses to strengthen against the dollar. The market remains sensitive to a possible rate hike by the Fed in September (despite expectations seemingly having shifted slowly but surely in favour of a hike in December).

The local currency continued to lose ground on Tuesday, hitting a high of 12.7404 against the dollar in late afternoon trade, closing the day at around 12.74. The rand is likely to remain under pressure today ahead of the US non-farm payrolls data due for release on Friday. Support for the USDZAR is at 12.6500, 12.5800, 12.5250 and 12.4800 and resistance is at 12.7700, 12.8000, 12.8500/9000, 13.0000 and 13.2000.

Comments by FOMC voting member Dennis Lockhart that he still sees a rate hike in September as a real possibility and that he would need to see a “significant deterioration” to hold off much longer for a rate hike pushed the dollar stronger and USTs lower. The rand depreciated immediately from around 12.66 late yesterday afternoon to the current 12.76. Combined with lower commodity prices, especially precious metal prices, we believe that the USDZAR would find it difficult to strengthen on a consistent basis past support at 12.6500 ahead of Friday’s US non-farm payrolls data.

As precursor to Friday’s US employment data, we will see the release of US ADP employment data today. Although the ADP and US NFP data tracks one another broadly, the m/m correlation between the two data sets is not necessarily strong. Nevertheless, the market will keep an eye on the ADP data and, if the number should come ahead of expectations at 215K jobs in July, we would expect further dollar strength.

Local developments

The Standard Bank South Africa PMI July data is scheduled for release at 09h15 today. Expectations are for the PMI to have remained below the 50-benchmark line in July. Recall, in June the index slipped below this line to 49.2 pts. Should the index record a second consecutive reading below-50, this would be in contrast to the steady upward trend of the BER PMI index which remained unchanged at 51.4 pts in July.

Also due for release later this morning is the SACCI Business Confidence Index for July. Expectations are for business sentiment to continue slipping. The index has been slipping steadily since the beginning of the year from 92.8 pts in February to 84.6 pts in June.

Markets

The rand weakened on Tuesday, closing at 12.74, compared to Monday’s close of 12.68. The rand’s depreciation against the greenback occurred in line with dollar strength against all of the major currencies; the dollar posted gains against the euro (-0.6%), the yen (0.3%) and the pound (-0.2%). The rand’s performance against the crosses were mixed; the rand gained against the euro (-0.3%), but lost ground against the pound (0.2%) and the yen (-0.1%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, ahead only of the NOK, and put in the fourth-worst performance amongst the EM currencies, behind the BRL, MXN and HUF. The rand traded between a low of USDZAR12.6227 and a high of USDZAR12.7404.

Commodity prices were mixed on Tuesday. Copper and gold were up by 0.3% and 0.1% on Tuesday, while platinum was down by 0.7% on the day. Brent closed the day 1.0% higher, at $49.99/bbl. The developed world MSCI was down by 0.1% on Tuesday, while the MSCI EM was up by 0.3% on the day. The ALSI was up 1.6% on the day. Non-residents were net buyers (ZAR358 million) of equities on Tuesday. The EMBI spread narrowed on Tuesday by 6 bps, and SA’s 5yr CDS narrowed by 2 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 3.5%.

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