ZAR range-bound ahead of FOMC

• The rand was in another 40 cent trading range yesterday. Following the downgrade of Brazil’s foreign currency rating to BB+ (negative) by S&P on Wednesday evening and with Asian and European equities on the back foot, the rand looked set to test the 14.00 resistance level again. The 13.50 and 14.00 levels are key support and resistance levels for the USDZAR ahead of next week’s FOMC meeting.

• On Tuesday, South Africa’s current account data for Q2:15 (we foresee a compression) will be released but we expect local markets to remain focused on Thursday’s FOMC meeting.

• Economists are split almost evenly about the prospects of a US rate hike next week, with the Bloomberg consensus poll seeing 39 economists looking for no change in the Fed fund rates next week, while 41 economists are looking for 25 bps hike.

• The Obama administration has made more headway with the Iran nuclear deal as the Senate has blocked a Republican resolution to reject the six-nation deal with Iran. The deal will therefore likely go through without the need for a veto from the White House.

• Stats SA released the mining production and manufacturing output data yesterday. Mining production growth overshot expectations, coming in at 5.6% y/y in July, from an upwardly revised 5.4% y/y in June.

• Manufacturing output came in at 5.6% y/y in July from a revised -0.5% y/y in June. Our economics team notes that the robust pick-up in production volumes was broad-based.

International developments

The rand saw another 40 cent trading range yesterday. Following the downgrade of Brazil’s foreign currency rating to BB+ (negative) by S&P on Wednesday evening and with Asian and European equities on the back foot, the rand looked set to test the 14.00 resistance level again. However, US markets opened on a positive note and changed the fortune of the rand around, pushing the USDZAR to a low of 13.55 last night. Global forces continue to whip the currency around. 13.50 and 14.00 are key support and resistance levels for the USDZAR ahead of next week’s FOMC meeting.

While next week Tuesday also sees South Africa’s current account data released for Q2:15 (we expect a compression), we expect local markets the remain focused on Thursday’s FOMC meeting. In fact, some positions such as long dollar positions against EM and/or commodity currencies may actually be unwound ahead of the event to reduce exposure. This may well add to rand strength going into the FOMC meeting.

As far as economists goes, they are almost evenly split about the prospects of a US rate hike next week, with the Bloomberg consensus poll seeing 39 economists looking for no change in the Fed fund rates next week, while 41 economists are looking for 25 bps hike. However, the Fed fund futures now assign only a 26% change of a rate hike next week, and a 59% change of a rate hike in December. Clearly someone is going to be wrong and at this point it does appear that the surprise would most likely be if the Fed actually hiked the Fed funds rate.

Given the rand’s close correlation to movements in especially equity markets, we continue to track developments there. Asian markets are subdued this morning, but generally up, following gains on Wall Street yesterday. Both the S&P and Dow Jones were up around 0.5% yesterday, which bolstered the Asian market today. At time of writing, the Shanghai Composite was up 0.2%, the Shenzhen Composite was up 0.4%, the Japanese Nikkei was flat for the day and the Hong Kong Hang Seng was up 0.1%. The markets will likely react strongly on Monday to data to be released on Sunday regarding Chinese investment, retail sales, and industrial output.

In the oil market it is worth noting that the Obama administration has made more headway with the Iran nuclear deal as the Senate has blocked a Republican resolution to reject the six-nation deal with Iran. This means that the deal will go through without the need for a veto coming out of the White House. If the deal is approved, Iran is likely to enter the oil market, adding to the oversupply and driving prices further down.

There is a lot of data coming out of the US today, but the numbers we’ll be watching out for are the University of Michigan surveyed inflation expectations. However, we would expect markets to look through any data releases today and towards next week.

Local developments

Stats SA released mining production and manufacturing output data yesterday. The mining production growth was expected to have moderated to 2.8% y/y, according to Bloomberg consensus, from 4.0% y/y in June. In the event, mining production growth overshot expectations, coming in at 5.6% y/y in July, from an upwardly revised 5.4% y/y in June. PGMs were again the key driver of the robust production volume. This is due to positive base effects from the strike in the sector which spanned H1:14. Our economics team believes that the combination of the decline in commodity prices due to a slowdown in demand from China, alongside domestic constraints may reduce export volumes of certain commodities over the medium term. However, volume reduction is unlikely to take place in commodities which are locked into take or pay rail contracts, which is the case in coal and iron ore. Export production volumes for these commodities may increase as miners attempt to cover fixed costs, as prices fall.

Manufacturing production for July also overshot consensus expectations. Output was expected to have improved in July, to 1.4% y/y, after having contracted by -0.4% y/y in June. Manufacturing output also came in at 5.6% y/y in July from a revised -0.5% y/y in June. Our economics team notes that the robust pick-up in production volumes was broad-based, with six out of 10 categories recording positive y/y growth. They had anticipated the presence of slight positive base effects in July’s manufacturing print accounting for the re-tooling of the Mercedes Benz factory, but the rebound in motor vehicle production volumes surpassed expectations, as did the growth in iron and steel. Electronics grew a significant and unexpected 54.8% y/y in July, although its small weight resulted in only a 0.93 ppts contribution to the final print.

Despite a recovery in manufacturing in July, signs from the PMI are negative. Manufacturers are facing low domestic and global demand for goods, which could explain why inventories have been declining according to data from both the BER and the Standard Bank PMIs. Higher input (and staff) costs are also expected to dampen margins further in a slow growth environment, which makes it more difficult for manufacturers to pass on higher prices to consumers.

Markets

The rand strengthened on Thursday, closing at 13.63, compared to Wednesday’s close of 13.79. 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 euro (0.7%) and the pound (0.5%), but gained against the yen (0.1%). The rand strengthened against all of the major crosses; the rand gained ground against the yen (1.3%), the pound (-0.7%) and the euro (-0.5%). The rand put in the best performance amongst both the commodity currencies we monitor for purposes of this report, and put in the second-best performance amongst the EM currencies, only behind the RUB. The rand traded between a low of USDZAR13.5582 and a high of USDZAR13.9651.

Commodity prices were mixed on Thursday. Copper and gold were up on Thursday, by 0.6% and 0.3%, while platinum was down 0.1% on the day. Brent closed the day 2.8% higher, at $48.89/bbl. Both the developed world MSCI and the MSCI EM were down on Thursday, by 0.2% and 0.7% respectively. The ALSI was down by 0.4% on the day. The EMBI spread widened on Thursday by 1 bp, and SA’s 5yr CDS widened by 3 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 7.1%.

Latest SA publications

SA Macroeconomics: Manufacturing up 5.6% in July: Robust growth led by iron & steel and motor vehicles production by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (10 September 2015)

SA Macroeconomics: Mining grows 5.6% y/y in July: PGMs up 72% y/y on base effects from the H1:14 strike by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (10 September 2015)

SA FIC Flash Note: ALBI reweighting: duration set for small increase in October by Walter de Wet and Penny Driver (9 September 2015)

SA Macroeconomics: SA manufacturing & mining to show positive growth in July: Despite risk aversion; SA received net portfolio inflows last week by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (7 September 2015)

SA Credit & Securitisation Special Report: Fitch withdraws from SA by Steffen Kriel (7 September 2015)

SA FIC Weekly: The rand is weak, but it has company by Walter de Wet, Shireen Darmalingam and Penny Driver (7 September 2015)

SA Credit & Securitisation Monthly: Focus on: Eqstra Holdings Ltd by Steffen Kriel (4 September 2015)

SA Macroeconomics: Aug vehicle sales -8.2% y/y: Passenger vehicle sales -8.3% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (2 September 2015)

SA Macroeconomics: August PMI retreats to 48.9: China's growth slowdown dampens manufacturing confidence by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 September 2015)

SA Macroeconomics: Jul records R0.4Bn trade deficit, YTD deficit shrinks to R25Bn: Base metal exports outperform, non-mineral import volumes contract by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (1 September 2015)